Fair Market Value for Your Business: What You Need to Know

Fair market value is a deeper way to assess value than a simple valuation. With this approach, the market determines the final value of the business based on what a buyer is willing to pay at any given time. This helps bridge a common gap: the one between what sellers think they deserve, and the actual value the business is likely to fetch. Because the market sets the value, though, there’s no way to fully and accurately estimate value ahead of time. Instead, the goal of this approach is to get a general idea of value and maintain reasonable expectations for the entirety of the M&A journey.

The Realities of Selling A Business

You might think that you’ll get a bite as soon as you put your business on the market. If so, you’re in for a rude awakening. Only a small percentage of businesses sell on their first try. Just 10% sell in their first three years. This fact is enough to stick a pin in the balloon of any prospective seller. Even in the right circumstances, selling a company can prove difficult. The process is very complex, and most sellers are at a disadvantage because they have never before sold a business. This points to the immense value of working with a professional broker.

The right broker can help set realistic expectations of the sale process and valuation. The market is uninterested in how much money you need to retire. Buyers only want to know how much value your company offers them.

The Four Components of a Successful Sale

So if value is really in the eye of the buyer, and the key to driving value is to drive value for the buyer, then sellers need to look at the business characteristics that will help drive the sale. There are four key factors to really hone in on:

  • Contractually recurring revenue, which increases profits and reduces risk.
  • Durable competitive advantage, which gives you a greater market share and reduces workload.
  • Growth rate, which points to a positive future forecast.
  • Customer concentration, which can help measure the sustainability of your business over the long-term.

Each of these four points warrants detailed consideration. Indeed, M&A experts have written entire treatises on each. The key takeaway here is that if you have enough time, value depends on factors that are largely in your control. Expand your customer base so you’re less dependent on a select few. Gain a competitive advantage. Look to subscription models. Find ways to build and sustain growth.

Ultimately, a skilled business broker who understands the ins and outs of valuation can bring significant value to the transaction. The broker works with you to navigate the complexities of setting a price. He or she can also identify shortcomings and areas for potential growth that may eventually increase value while attracting well-qualified buyers. If your goal is a competitive bidding environment—and it should be, since this is what drives value, a business broker is your best ally for creating it.