{"id":5923,"date":"2021-10-04T19:19:48","date_gmt":"2021-10-04T19:19:48","guid":{"rendered":"https:\/\/intelekbusinessvaluations.com\/en-au\/?p=5923"},"modified":"2023-04-24T20:16:17","modified_gmt":"2023-04-24T20:16:17","slug":"business-fair-market-value","status":"publish","type":"post","link":"https:\/\/intelekbusinessvaluations.com\/en-au\/business-valuations\/business-fair-market-value\/","title":{"rendered":"Business Fair Market Value"},"content":{"rendered":"<div class=\"itemIntroText\">\n<p>A\u00a0business fair market value (FMV),\u00a0or market value, is commonly used in business valuations and is defined by several public institutions or valuation associations as: \u201cthe price that would be negotiated in an open and unrestricted market between a\u00a0knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm\u2019s length.\u201d\u00a0If you\u2019ve ever asked yourself,\u00a0\u201cWhat\u2019s the value of my business? And according to what? The market? My competitor? Why do we define fair market value, and what\u2019s it used for?\u201d\u00a0Read this article for the answers to all of those questions.<\/p>\n<p>In context of the term \u201cfair market value\u201d, here are some definitions:<\/p>\n<ul>\n<li><strong>Fair<\/strong>: the buyer has all the important information to make an informed decision when negotiating the price<\/li>\n<li><strong>Market<\/strong>: a hypothetical buyer across the entire market (in other words, NOT a specific party that has a specific reason to pay extra for it, as in the example of a car collector paying double the price for a vehicle because it completes their collection)<\/li>\n<\/ul>\n<p>So why do we need this concept of standard of value, which in this case we call \u201cfair market value\u201d?<\/p>\n<p>Knowing the fair market value of your business can be used for several different purposes. You might find yourself in a position in which you wish to\u00a0sell your business\u00a0because you\u2019re retiring, but you want to make an informed decision about what the current market (hypothetical buyer) value of your business is.<\/p>\n<figure id=\"attachment_7402\" aria-describedby=\"caption-attachment-7402\" style=\"width: 700px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-7402\" src=\"https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/10.jpg\" alt=\"Business Fair Market Value Australia \" width=\"700\" height=\"400\" srcset=\"https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/10.jpg 700w, https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/10-300x171.jpg 300w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><figcaption id=\"caption-attachment-7402\" class=\"wp-caption-text\">Business Fair Market Value Australia<\/figcaption><\/figure>\n<p>This could apply as well to certain\u00a0share schemes,<strong>\u00a0<\/strong>in which employees are offered shares, so what is the fair market value of those? The answer would have tax implications, and the tax department needs to know what the fair market value is.<\/p>\n<p>On the other hand, there may be one 50% shareholder\u00a0buying out the other,\u00a0or you\u2019re planning to hand the company to one of your family members (in which there could be\u00a0capital gains or gift tax implications), so how much capital did they actually gain?<\/p>\n<p>You might say that your business is worth $1 million, but in the eyes of the tax department, it could be worth $2 million because this is what a buyer in the market would pay without a family member discount. Furthermore, you may have sold it to someone with strategic interests, and the price has inflated past FMV. Consequently, valuing your business under or over fair market value means potentially paying incorrect taxes, which can have obvious consequences.<\/p>\n<p>Alternatively, you could be planning your\u00a0exit from business<strong>\u00a0<\/strong>and would like to know the current value if you \u201cwent to market\u201d, so to speak.\u00a0\u00a0A valuation would help to set your objectives and let you know how to increase your business\u2019 value in order to achieve your price goals at sale.<\/p>\n<p>You can then start looking for a specific buyer with synergistic interests, and achieve a sale over FMV (for example, a retail seller buying the wholesaler business).<\/p>\n<p>How you arrive at the fair market value<strong>\u00a0<\/strong>for your business is a complex and detailed process that is beyond the scope of this article. As there are a myriad of datapoints, variables, and assumptions that go into the process, it\u2019s important to consult a professional valuer.<\/p>\n<p>Oftentimes with small- to medium-sized businesses, the business is the largest or one of the largest assets within the owners\u2019 portfolio. For this reason, not having a professional valuation can leave your company grossly under or overvalued, which can potentially cause implications with the ATO or your business to remain advertised for sale for years without an offer. Also, you might end up buying your business partners\u2019 shares for a significant amount over the value you should have paid.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-7197\" src=\"https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/Business-Fair-Market-Value-1.jpg\" alt=\"Business Fair Market Value Australia\" width=\"700\" height=\"438\" srcset=\"https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/Business-Fair-Market-Value-1.jpg 1296w, https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/Business-Fair-Market-Value-1-300x188.jpg 300w, https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/Business-Fair-Market-Value-1-1024x640.jpg 1024w, https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2021\/10\/Business-Fair-Market-Value-1-768x480.jpg 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A\u00a0business fair market value (FMV),\u00a0or market value, is commonly used in business valuations and is defined by several public institutions or valuation associations as: \u201cthe price that would be negotiated in an open and unrestricted market between a\u00a0knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm\u2019s length.\u201d\u00a0If [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":5931,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[42,36,43,45,202,44,203,204],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v17.8 - 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