How to determine the fair market value of your business

If you're thinking about selling your company, you'll want a good estimate of your firm's fair market value. In general terms, the fair market value is the price that a reasonably informed buyer and seller would agree to if neither were under any kind of compulsion. Of course, the actual selling price will likely differ from such a theoretically derived value. But a careful business valuation can provide a realistic estimate of your firm's worth.

To get a ballpark estimate, you might start with a rule-of-thumb formula. Associations and trade groups in your industry will generally provide such guidelines, often expressed as a multiple of sales or net income. Of course, these are free estimates and don't take into consideration the many factors that affect the ongoing value of your business. Rule-of-thumb formulas are a starting point, but don't count on them to provide an accurate picture of your company's worth.

You can also purchase business valuation software. Computer applications may provide a better estimate than the rule-of-thumb method because they crank in a few more factors. Business valuation software takes asset and income information from your financial statements and/or tax returns and uses it to generate a fair market value. Again, you'll get a range of values that may or may not determine what your firm would fetch in the marketplace.

If you're really serious about selling your business, however, it makes sense to hire a seasoned business valuator. An appraisal by a trained professional with experience in your industry won't come cheap. But if you've spent years nurturing your business and making it successful, you'll want to sell it for the best possible price. A professional valuator should consider the following factors to determine your firm's fair market value:

• The general condition of the company, including such things as financial records, facilities, and employee morale.

• Special circumstances of the buyer and seller.

• Recent profit history.

• Market demand.

• Economic conditions.

• Future profit potential.

• Ability to transfer intangible assets to the new owner, such as good customer relationships and a well-respected business name.

If you'd like assistance with determining your firm's fair market value, give us a call.

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