Business value is far more than dollars and cents. The government has one way of evaluating a business at tax time, but potential buyers, customers, and the competition are sizing up your business constantly – and they aren’t just interested in the bottom line.

Fair Market Value

Business valuation is made up of a fair amount of accounting and a lot of guess work. The fair market value of a business is what is used when a business is sold or for any number of other legal purposes. To determine the fair market value of a business, you must consider cash flow, tangible assets, appreciation and more.

The government calls a fair market value the dollar amount of a business where the seller and the buyer both agree. With such a loose definition, there are countless ways to estimate your business’s value. Depending on industry, your business value may be a product of a period’s cash flow multiplied by a certain number or something considerably more complex. There is no exact formula for determining the overall value of a company as values fluctuate within industries and over time.

Government Valuation

At tax time, your company is evaluated based on its debits and credits. Gross receivables and assets are offset by liabilities and expenses. At the end of the accounting process you have a company income that is tax worthy. This number is often far less than any true value of your company. Accounting and tax write offs help many companies find ways to make tax values far less than reported earnings. However, reported income through the government can help gauge your company’s progress and provide a starting point for evaluation. (more…)