The term “Fair Market Value” (FMV) of a Business is defined by the Internal Revenue Service (IRS) laws and regulations. The FMV value is required by law to be used if a question of value is before the IRS or the court. The FMV is also often used if a business value is in dispute between two business partners.
You have to ask yourself if you are fine with the IRS specifying the exact procedures used to determine how valuable your childcare center is. As business brokers representing childcare centers, we know that a FMV will rarely match the price and terms which a buyer will pay for a childcare center.
The “Fair Market Value” (FMV) of a Business is defined by the Internal Revenue Service (IRS) as:
- The cash price at which property would change hands
- between a “Hypothetical” willing buyer and seller, neither being under a compulsion to buy or sell and
both having a reasonable knowledge of relevant facts.
- Reasonable time on market
- Acting in their own best self-interest financially no strategic or synergistic interest
As childcare brokers, our goal in valuing a business to calculate the actual market price and terms that a buyer will likely pay. We call this the Most Probable Selling Price (MPSP) or Professional Estimate of the Market Price and Terms, which we define as:
- That price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller
- considering compulsion on the part of either buyer or seller, and potential financial, strategic, or non-financial benefits to seller and probable buyers.
Although this Estimate of the Market Price and Terms or MPSP cannot be used in court, it is the best way to value a childcare center when it is for sale. It can be a very valuable tool for business owners when doing retirement planning.
Factors Included in MPSP (These are factors which the IRS has decided to NOT incorporate into determining the FMV):
- Seller has motivations other than obtaining a fair price
- Buyer has considerations other than price that determine interest and provide motive
- Buyer is often impatient to buy
- Seller is prepared to accept part of sale proceeds on terms other than cash
- Either or both Buyer and Seller have limited knowledge of market and/or financial implication of a transfer of ownership
- Buyer’s skills and knowledge relevant to future success in the business are different that the Seller’s
- Transaction may require training of Buyer by Seller
- Typically less than all of the assets of the business are being transferred (ex. Childcare center owners often keep the cash and accounts receivables outstanding on the date of sale.)
- Broker’s actions may have a material impact on the identification of the best qualified Buyer from the perspective of the Seller’s interest.
- Best qualified buyer may include non-financial factors
- Management of the selling process may materially effect the financial benefit realized by the Seller and/or Buyer