Book value is not fair market value
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BOOK VALUE IS NOT FAIR MARKET VALUE
Many business owner fail to consult with independent valuation firms to determine the fair market value of their business, relying instead on book value. Though it can be costly, a proper valuation can end up saving business owners millions of dollars!
[Graphic of a book] What is book value? Vs. What is fair market value? [Graphic of a calculator]
Book value: Total assets minus total business liabilities equals book value
Fair market value: Price a willing buyer and seller would transact at, often very different from book value
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Book value may not account for customer relationships or future business value and growth.
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Fair market value is dependent on variables like the economy, if the owner feels pressured to sell, and how quickly a qualified buyer can be identified.
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An inaccurate business valuation can result in:
-Underpaying the seller
-Not having enough money to live off during retirement or disability
-Not leaving enough money to a business owner’s family upon death
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Business valuation is not an exact science. Having a skilled appraiser is critical.
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Having an idea of what your business is worth is not the same as knowing its fair market value.
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If an owner’s estate is appraised at book value, not fair market value, the IRS may challenge and increase the valuation for estate tax purposes.
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Business owner valuation disagreements may result in a legal dispute when an owner wants to or is forced to opt out.
POTENTIAL OUTCOMES OF APPRAISAL
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BOOK VALUE GREATER THAN MARKET VALUE:
The assets on the books are worth more than future profits and cash flows
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MARKET VALUE GREATER THAN BOOK VALUE:
Consistently profitable companies typically have market values greater than book values.
WHAT ARE SOME WELL-KNOWN VLAUATION METHODS?
[Graphic of a book saying book value] BOOK VALUE
[Graphic of a calculator] CAPITALIZATION OF EARNINGS
[Graphic of a dollar bill being cut in half by a pair a scissors] DISCOUNTED CASH FLOW
[Graphic of an office building with trees in front of it] COMPARABLE COMPANY SALES
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2022-145434 (Exp. 10/24)