When considering the value of your Maine-based small business, you may not have considered what standard is used in the determination. It can be a fairly important question that affects how the valuation turns out. Any qualified valuation report should state the standard of value used in determining the value in the very beginning of the report.
Here are the five generally recognized standards of value and their meanings and uses:
1. Fair market value is used most often in valuations for gift, estate, and income tax matters. It is often used in litigation matters and in determinations of value in buy-sell agreements. It is not, however, always the price at which the business might actually be sold or bought. So if your purpose is to determine a price for your business, the FMV is more of a guide than an actual value. Consult with Filler & Associates to further pursue this.
2. Investment value standard might be used, for example, when a business is deciding at what price to buy another business or business related asset. An internal rate of return might be used to determine the value to pay for an expected stream of cash flows from the business being acquired.
3. Intrinsic value standard is not often seen in practice and is used mostly by investment analysts and bankers to find the fundamental price of an often publicly traded security.
4. Fair value—legal standard often emanates from state laws dealing with shareholder dissent actions or matrimonial law. Often the main difference between Fair Value and FMV is that the Fair Value often excludes any discounts for lack of control or lack of marketability.
5. Fair value—financial reporting is the same term used by the Financial Accounting Standards Board (FASB) and the SEC to describe the value determination set of rules to be used by businesses in reporting the values of assets required under the accounting standards.
Clearly, it is very important for the user of a business valuation to know what standard is being used and how it might apply to the final result given.
If you have any concern over the standard of value and its importance to your small business, consult with Filler & Associates.