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The Myth of Fair Business Valuation When Selling a Business

Many entrepreneurs face the challenge of determining an appropriate and fair business valuation when selling a business. This article aims to demystify the notion of "Fair Business Valuation" or "Fair Market Value" by providing a comprehensive overview of the subject. It will discuss common misconceptions about business valuation and offer practical advice on how to come up with an assessment of what your business is worth.

 

How Business Valuation Works

Business Valuation is the method used to determine a monetary figure for a company's value when selling a business. Businesses are typically valued based on assets, liabilities, and earnings potential.

● Assets refer to the physical (machinery, buildings, etc.) and intellectual properties (patents, copyrights, trade secrets, etc.) owned by the business.
● Liabilities refer to any debts or obligations owed by the company.
● Earnings potential reflects how profitable a business can be in the future, given its current prospects.

Valuers consider all these factors when performing a business valuation to determine an "accurate price" for its sale.

Why Fair Business Valuation is Hypothetical

While certain guidelines and formulas determine a business's price, the idea that there is an exact definition of a "fair" price can be misleading.

In reality, the business value considers multiple factors, including market conditions, mode of payment, buyer's perceived value, the unique complexities of a particular business, and other external forces.

However, valuers do not consider factors such as payment mode and perceived value when arriving at a "fair value." As such, it can be difficult to define what constitutes a "fair" valuation for any given sale.

There is No Fair Value for Illiquid Assets

When selling a business, there is often a discrepancy between the market price of its assets and what the owner considers to be its fair value. This concern is especially true for illiquid assets, which cannot easily be converted into cash or traded on a secondary market. Without a ready market for these types of assets, it can be difficult to determine their true worth and agree on how much they should be valued as a whole.

Overestimating Intangible Possessions

When selling a business in Georgia, most owners overestimate the value of intangible possessions such as relationships and goodwill. A common misconception is that these unmeasurable assets are worth more than they are in negotiations. However, the reality is that buyers don't factor or do not give too much weight to intangible possessions into their offer price. This situation can lead to heated disputes and seemingly never-ending haggling between parties, ultimately resulting in an incomplete sale.

Sellers must understand that buyers place tangible assets at a higher premium than those which cannot be measured or quantified. Buyers have little to no sentimental value to your intangible possessions, such as customer relationships. It's a tough pill to swallow. But it is what it is, period.

Hence, any estimated value placed on intangibles must be based upon realistic market conditions, not inflated fantasy figures. We don't say that intangible assets do not add value to a business. But the owner should not structure their entire sales offer around them. Because no established metrics by which valuations (on intangible assets) can be made, it's impossible to guarantee that the arrived numbers will hold up in negotiations with potential buyers.

The Market and Buyer's Perception Determine the "Fair Value"

In conclusion, the concept of "fair value" when selling a business is often illusory. Ultimately, market conditions and buyers' perceptions play a decisive role in what constitutes fair value for a particular business. Hence, it's important to understand the complexities before entering any sale agreement.

Business owners in Georgia need to be aware that market conditions and buyer expectations can quickly affect the perceived "fairness" of a sale price. When competition creates a frenzy to purchase a company; the highest bidder usually obtains the best terms – not necessarily the fairest deal. The same goes for businesses in low demand or with limited buyers; they may be forced to accept less favorable terms than they would like due to a lack of competition.

Perhaps the most important thing to remember when it comes to determining the value of a business is that every transaction involves two parties – the buyer and seller – and each one will have their interests at heart. The seller may try and obtain as much money as possible for their business, while the buyer may look for ways to get the best deal possible.

At the end of the day, a fair business valuation is the number that both parties accept wholeheartedly as a Reasonable Sale Price.