Business Marketing Services performs business appraisals of small and middle market companies. The first step in selling or purchasing a business is determining its fair market value. The Internal Revenue Service defines “fair market value” in Revenue Ruling 59-60 as follows:
…”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.”
The approaches to valuation are:
- A determination of fair market value will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues. Often the appraiser will find wide differences of opinion as to the fair market value of a particular business. In resolving such differences, the appraiser must recognize the fact that valuation is not an exact science. A sound valuation will be based upon all the relevant facts, but the elements of common sense and informed judgment and reasonableness must enter in the process.
- The fair market value will vary with general economic conditions. Uncertainly as to the stability or continuity of the future income from a property decreases its value by increasing the risk of loss of earnings in the future. The value of a company with very uncertain future prospects is highly speculative. The appraiser must exercise his judgment as to the degree of risk associated with each company.
- The valuation is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal. As a generalization, the prices of stocks which are traded in volume in a free and active market by informed persons best reflect the consensus of the investing public as to what the future holds for the corporation and industries represented. When a stock is closely held, it is traded infrequently, or is traded in an erratic market, therefore some other measures must be found to approximate value.
The following eight factors, although not all-inclusive, are fundamental and require careful analysis in each appraisal:
- The nature of the business and the history of the enterprise from it inception.
- The economic outlook in general and the condition and outlook of the specific industry in particular.
- The book value of the stock and the financial condition of the business.
- The earning capacity of the company.
- The dividend-paying capacity.
- Whether or not the enterprise has goodwill or other intangible value.
- Sales of the stock and the size of the block of stock to be valued.
- The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.
Business Marketing Services is uniquely qualified to appraise businesses because appraisals should “mirror” the market, and we are in the market every day. We are members of The Institute of Business Appraisers, the premier professional society of business appraisers, and all appraisal reports meet its Business Appraisal Standards.
Approximately half of the business appraisals performed by Business Marketing Services are for sellers or buyers who need to know the value of the business for reasons related to a sale or purchase. We also appraise businesses for buy-sell agreements and stockholder disputes.