What Is Fair Market Value?

If you have conducted any research into mergers and acquisitions, you have probably come across the term ‘fair market value’. This is one of the ways in which you can assess the appropriate price of acquisition and set the minimum price you are willing to accept as a seller. But what exactly is fair market value?

Read on to find out.

Definition

Fair market value, or FMV as it is sometimes written, is the price that a specific asset (in the case of M & A activity, the business) would expect to sell for on the open market. This is usually further qualified by setting certain conditions: both the buyer and seller have a good level of knowledge about the business, each is acting in good faith and to their own best interest with no external pressure to buy or sell (health concerns, debts, etc), and there is no time constraint on the deal.

If all those circumstances were met, then the FMV is the price that would be agreed upon by both parties.

How does FMV apply to business transactions?

You have probably come across FMV at some point, and not known it. The Kelley Blue Book, for example, provides FMV figures for vehicles, and real estate agents will typically provide a fair market value if you are looking to purchase or sell a property.

Business is no different in the nature of the FMV, but the assessment of it can be more complex. Firstly, there are more parts to your business than there are in a simple second-hand car sale –contracts, stock, customer base, competition, leases –these all affect the overall value of the business. Secondly, there are significantly fewer prospective purchasers for a company than there are for cars and houses, so the FMV will depend on a smaller pool of buyers to determine the competitive element of the value.

Calculating fair market value

Fair market value is not strictly speaking ‘calculated’, it is assessed. That is because there are other factors at play than simple numbers –you need to incorporate the market conditions, your growth potential, and business competition, for example. To get a full, reasonable fair market value figure, your best bet is to consult with an expert. Much like if you were to get an antique appraised, you would take it to someone who knows antiques, so should you turn to someone who knows business transactions –specifically for the sector in which your business operates ideally.

Pinnacle Pharmacy Group

At Pinnacle we have been handling mergers and acquisitions for the pharmacy business and digital health industry for many years, and have an established track record of success, coupled with 100% client satisfaction. Get in touch today to find out more about our services and how we can help you to make the most of your business purchase or sale.