Do you know the value of your business? There are myriad reasons why you might need to know — from mergers and acquisitions to estate issues or marital dissolution. When the time comes, understanding how a fair and accurate business valuation is determined is of paramount importance.
“The first step in valuing a business is to determine the standard of value,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley. “This is the type of value that is being requested for the business. The three most common standards of value are fair market value, fair value and strategic/investment value.”
The IRS defines fair market value 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.”
Fair market value is the most widely recognized and accepted standard of value, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley. Fair market value is used to establish value for all Federal tax matters, including estate tax, gift tax and income tax, he said. This standard also is used for many purchase, sale and merger transactions; for buy-sell agreements; for regulatory valuations; and for most litigation matters, including partner/shareholder disputes, divorces and economic damage cases. Fair market value takes into consideration discounts for lack of control and lack of marketability.
Fair value generally is defined as fair market value without considering discounts, Anderson said. Fair value principally is used to value the shares held by a company owner with a minority interest when that person believes he is being forced to receive less than adequate compensation for his shares. Fair value also may apply to divorce cases in some states.
Strategic/investment value is the value to a particular investor based on individual requirements and expectations, according to Anderson. This standard most often is used for a purchase, sale or merger in which the buyer expects to realize certain synergies with the seller’s business. Strategic/investment value typically is higher than fair market value because of these synergies.
“The standard of value is one of the key components used to determine the valuation methodology to be employed and, ultimately, the business valuation expert’s decision on the value of your business,” Anderson said.
Over the next several weeks, Anderson will post additional articles on the specific methods business valuation experts use to determine value, the effect non-operating assets have on business valuation and discounts for lack of control and lack of marketability. Up next in Understanding Business Valuation, Part II: Determining the premise of value, the type of transactional circumstances that underlies the business or property being valued.
If you require the services of a business valuation expert in Philadelphia or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at firstname.lastname@example.org.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner, a Certified Valuation Analyst and a business valuation expert in Philadelphia.