PART II: Fair Market Value - The Best Measure of a Company's Value.
Determining fair market value of your diesel repair shop can be a complicated undertaking. There are many ways to estimate the fair market value of a business, none of them definitive, but all of them useful.
Fair market value is usually defined as the price at which a business would change hands between a willing buyer and a willing seller when there is no compulsion to buy or sell, and both parties have reasonable knowledge of the relevant facts.
Factors to consider are:
- The nature of the business and its history from inception.
- The outlook for the economy and the company’s industry.
- The book value and overall financial condition of the business.
- The company’s past, present, and future earning capacity.
- The company’s ability to pay dividends.
- The existence of goodwill or other intangible assets (e.g. licenses, patents, intellectual property).
- Sales of the company’s stock and the size of the block to be valued.
- The market price of publicly traded stocks of companies in the same, orsimilar industry.
The easiest and usually best way to determine the fair market value of your repair shop is to ask an expert. There are specialized consultants, accountants, business brokers, and investment bankers whose expertise is in business valuation.
Four Techniques for Estimating Fair Market Value.
Whether you hire an expert or do it yourself, you should know the basic ways to estimate the fair market value of your diesel repair shop. There are many formulas and estimating techniques, but when push comes to shove, there are five well-known approaches that are widely accepted in the business investment community. These five approaches are:
1) Comparable Transactions
2) Industry Norms and Guidelines
3) Stock Prices
4) Investor’s Rate of Return
Theses techniques seek information about company values from experiences and perceptions in the outside world. They reflect the realities of the market and the values of businesses that have actually been sold; and therefore, they reflect actual market conditions.
Most business valuation experts use several estimating techniques to define a range of value, rather than a single number. That’s the professional approach to take, since a point estimate doesn’t leave room for the variety of buyer’s perceptions and decision processes that exist in the market.
Each technique has its strengths and weaknesses. The best approach is to use all four techniques and compare the results of each. You’ll probably get four different estimates because each technique comes at the problem from a different perspective, but the estimates will define the range of values that would be reasonable to expect if you were selling your business on the open market.
In Part III of this blog series we take a closer look at each of the four basic valuation techniques.