Business valuation standards

What standard of value is applied to your business?

There are differences between the fair market value, fair value, and strategic value standards. The differences affect how your business is valued.

The value of your Company is different based on the standard of value applied. In general, strategic value is a premium to fair market value. This range of value may be a reason behind the Entrepreneur’s reporting that 98% of business owners do not know the value of their company.

Fair market value

The fair market value standard is used for IRS matters, financing, litigation, and internal transfers of ownership. It is defined as the price at which property would change hands between a willing unknown buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of facts. This standard can have discounts applied for lack of control (50% or less of ownership) and/or marketability.

Fair value

The fair value standard is used for financial reporting and owner disputes. It is defined in general as fair market value with no discounts applied (as defined by a state's statutes). This standard does not apply discounts for lack of control (50% or less of ownership) and/or marketability.

Strategic value

The strategic value standard is used for transfers of ownership to third parties. It is defined as the value of a business to a specific buyer. This standard does not apply discounts for lack of control (50% or less of ownership) and/or marketability.

Comparing the methods

Standard of value Fair market value Fair value Strategic value
Purpose(s) IRS matters, financing, litigation, internal transfers of ownership Financial reporting, owner disputes Transfers of ownership to third parties
Definition The price at which property would change hands between a willing unknown buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of facts. In general, fair market value but with no discounts applied (defined by state statutes). The value of a business to a specific buyer.
Discounts applied for lack of control (<=50% ownership) and/or marketability Yes, as applicable No No
Normalization adjustments made to restate earnings streams for:
Nonoperating, nonrecurring, out-of-market income and expenses Yes Yes Yes
Revenue and cost synergies/economies of scale due to acquisition No No Yes
Concluded value considers:
Getting rid of a competitor No No Yes
Gaining access to a company’s “space”
Higher gross or net earnings multiple due to combined entity larger size, synergies
Available capital to deploy

Questions?

To start determining your business' value, contact Cathy Mitchell using the information below.

Cathy Mitchell, ABV

Vice President
Business Valuation Services

Cathy Mitchell joined AGH in 2010. Her focus is providing valuation and tax services primarily to closely held and family-owned businesses. Related to her valuation work, Cathy has completed extensive training in the specialized field of business valuation and earned the American Institute of Certified Public Accountants (AICPA) accreditation in business valuation (ABV) credential. In addition to providing valuations for many purposes, she provides litigation support services for those integral to divorces and other contested matters.

Prior to joining AGH, Cathy was a member of an international CPA firm, where she was promoted to tax manager. Following that, she established and managed her own tax preparation and business consulting firm for 14 years. She received her bachelor’s degree in accounting from the University of Kansas and earned gold key for top scorer in Kansas and the Elijah Watts Sells award for earning one of the top scores nationwide on the CPA exam. Cathy is a member of both the AICPA and the Kansas Society of Certified Public Accountants, for which she serves on the steering committee for its annual business valuation conference. She also speaks regularly on business valuation and other topics to professional groups and students.

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