Fair Market Value is the fairest, best measure of the likely selling price of a privately held small business. It establishes "what it's worth" in the marketplace, much like the stock price says what investors will pay to own shares of a large public company.
Owners of small, privately held businesses don't have a stock price to measure their firms' value. Instead, they must work with a professional to appraise the value using the best data available, subject to the correct formulas and experienced judgement of the appraiser.
On the PassTorch website, value, market value and fair market value will be used interchangeably. Except for the very technical reader, they mean the same thing.
In contrast, "book value" means something quite different. It is a statement of the value of the company's assets minus the value of its liabilities. Simply put, it is the money left in your hand after liquidating all the "stuff" and paying off debts. Small businesses rarely change hands for book value, because their ability to generate a profit from the assets makes them worth more than just the assets themselves.
An appraiser would use the following rules and definitions in a typical report:
Fair Market Value, as used herein, is defined as “The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.” This definition comports favorably with the text of Revenue Ruling 59-60.
As used here this definition of Fair Market Value incorporates the following assumptions:
The prospective purchaser is prudent and profit seeking, and without synergistic benefit,
• The business would continue as a going concern and not be liquidated;
• The business would be sold for cash or cash equivalent; and
• The business would be held on the market for a reasonable period of time.
Hypothetical Buyer. The prospective purchaser under the fair market value standard is hypothetical. The prospective purchaser is anonymous, represents a composite of all arms- length purchasers, and is presumed to be a financialas opposed to a strategicpurchaser. This assumption excludes the buyer who by virtue of some other business relationship will benefit from some “value-added” effect on the respective values of some other business and the subject. This standard of value also usually excludes from consideration the value of the business to specific existing shareholders, creditors, or a related or controlled entity, which may be willing to acquire the subject at an artificially high or low price because of motivations not typical of an arm’s-length financial buyer.
Hypothetical Seller. The seller under the fair market value standard is anonymous, and is assumed to know all relevant facts regarding the effect of market forces on the value of the subject, the effect of risk on value, the return available from alternative investments, the effect of control characteristics on value, and the effect of liquidity on value.
