The most common definition of value used in the business valuation process is Fair Market Value. Its popularity is based on IRS Revenue Ruling 59-60, which is the basis for all federal tax decisions, and is used by the IRS and the courts.
Because of its governmental favor, valuation professionals gain valuable guidance on performing the valuation. Here is the wording of IRS Revenue Ruling 59-60, defining Fair Market Value:
“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, bother parties having reasonable knowledge of relevant facts.”
Another worthy definition of FMV is voiced by the International Glossary of Business Valuation Terms, available on the American Institute of CPAs website:
“The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”
Fair market value is one of five types of ways your business could be valued. The others are fair value, book value, intrinsic value and investment value. We’ll cover these in future posts. For more information on this topic, please consult Maas’ book “Exit Insight: Getting to ‘Sold!’” available for just $24.95 at Merrell Publishing or Amazon.com, or call the business valuation experts at Synergetic Finance today at 206-386-5455.