Determining the Fair Market Value of a Business - VR Business Sales Blog

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Friday, January 7, 2011

Determining the Fair Market Value of a Business

Peter King
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It should be noted that in determining the fair market value of a business, the appearance of the establishment, equipment and products is imperative. In particular, the equipment must be judged on mechanical and electrical working conditions and not just on appearance. Paint, lubrication and general clean up should be part of general maintenance and should not be used to cover up defective equipment.  
The physical condition, deterioration, depreciation or state of repair is a major factor in values. Loss of value due to curable or incurable depreciation is a consideration of market value.
Assuming the current owner paid for leasehold improvements and the local lease market is not providing spaces built to the tenant's specifications, use the following schedules:  
Long Lived Improvements (10 to 25 year life)
Walls, electrical wiring and plumbing can be valued at the original cost of installation with no deduction for depreciation. (Inflation rates will compensate for depreciation)  
Intermediate Lived Improvements (5 to 10 year life)
Signs, water heaters, air conditioners, air compressors, furnaces, etc. Use a "straight line" depreciation based on actual useful life.  
Disposable or Fashionable (0 to 5 year life)
Carpeting, blinds, draperies, etc. are subject to rapid wear and fashion trend and will be worth;
75% of original cost if in new condition.50% of original cost if in good condition25% of original cost if in fair condition0% of original cost if in worn condition  
In the case of vehicles or rolling stock, there are three good sources for price information:  
  • Blue Book Value. This guide is available at many bookstores for a nominal fee and is extremely reliable. 
  • Classified Ads. Many local publications and newspapers advertise vehicles and the average price from a number of ads will represent the prevailing market.  
  • Depreciation Schedule Model. Minimum value is 20% of original cost.
Every business has some inventory of stock for internal use or products for resale. The actual value of stocks or inventory is usually determined by a physical inventory completed the day the business sale is consummated.
You can use the following sources for information:
  • Have a professional inventory service determines market value.
  • Use last year’s tax statement to find your "ending inventory" and "beginning inventory." Be careful, since many people make year-end adjustments to inventory levels for tax purposes. Look for the value on a "Normal Day."


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