What is Your Business Worth?

Fair Market Value (FMV) is the estimate of what something is worth. But, FMV differs from intrinsic or sentimental value, as both parties to a transaction must agree as to the worth.

The Internal Revenue Code defines FMV as 'the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.' For this definition, the seller and buyer are both assumed to be hypothetical.

Court decisions frequently add that the hypothetical buyer and the hypothetical seller are assumed to be able and willing to complete the transaction. Additionally, Courts have added that both parties are well informed, both about the subject property as well as the market for such property.

The IRS regulations state that 'all relevant facts and elements of value as of the applicable valuation date shall be considered in every case.' Accordingly, intrinsic or sentimental value must be dismissed as a benchmark, as there is likely no meeting of the minds with a hypothetical buyer. In other words, that sweater that your aunt knitted you is worth more to you than to any other person. Sentimental value must be dismissed as a benchmark.

The same is true for the FMV of closely-held businesses. Sentimental value, because of the blood, sweat, and tears of the seller, needs to be dismissed, and an independent analysis of FMV should be performed. A business valuation expert should be used to determine the FMV, with various methodologies available for analysis. However, as the IRS notes, 'a sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.'

Lastly, it is worth noting that IRS considers business valuation - the determination of FMV of a particular enterprise - to be an art and not a science. The IRS has stated, 'an appraiser will find wide difference of opinion as to the fair market value of a particular stock. In resolving such differences, he should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science.'

In summary, FMV is what two parties with different interests decide something is worth. Business valuation is the process of estimating that number. However, it is still just an estimate.

For assistance with determining the value of your business, please contact Ray Harrison or Mike Melchi .

IS YOUR MANAGEMENT VISION BLURRY?

As small business owners, we make decisions impacting our companies every day. The challenge we face is whether these decisions are 'by the seat of our pants' or part of a long-term strategy. To make better decisions, our companies need a vision to be the benchmark for those decisions. And yet, many small business owners let the 'busyness' of business keep them from developing their vision.

Most of us wouldn't set out on a trip without an ultimate destination. Our destination keeps our actions in focus--a road map, if you will--to where we want to go. In a business, our destination represents what we want to accomplish and can be expressed through a purpose or mission statement, core values, etc. Accomplishing this can seem like an overwhelming task, but it will produce more focused efforts to help us manage our business. Understanding our purpose/mission first allows us to develop effective strategies to focus the energies of our personnel. The clearer our vision as owners, the easier it is for our employees to understand and become part of the team.

Although this may seem theoretical at first, I can tell you from experience, it works. For this our story. I was letting my 'busyness' blur my vision. Making the effort to develop our purpose/mission statement and core values allowed us to focus on strategies to direct the effectiveness of our efforts. The rewards are worth the effort!

For comments or questions, contact Ken Bowen .

For more information please contact us here.