About Fair Market Value

 

"The Fair Market Value (FMV) is the most probable price that an asset should fetch in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently,  knowl­edgebly, without compulsion  and assuming the price is not affected by undue stimulus." 

Implicit in this definition is the assumption that:

Buyer and Seller are typically motivated; Both parties are well informed or well advised, and acting in  what they consider are their own best interests; A reasonable time is allowed for exposure in the open market; Settlement is made in terms of cash in Australian dollars or in terms of financial arrange­ments compara­ble thereto; and the price represents the normal consideration for the asset sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Premis of Value - Going Concern Businesses:  FMV appraisal is a suitable assessment method for "Going Concern" businesses. The 'premis' of a Going Concern business is of a business which will continue to operate indefinitely and will not go out of business and liquidate its assets. For this to happen, the business must be able to generate and/or raise enough resources to stay operational.  If the business cannot generate enough revenue or raise (borrow) enough resources to remain operational then it is not a Going Concern business and would be better valued by another methodology.

Fair Market Value in an Asset Sale of a Going Concern BusinessFMV of  a  going concern business is based on the Appraiser's conclusion of a probable sales price if the business were to be hypothetically sold between hypothetical parties. (In addition to the businesses unique fundamentals, the Appraiser uses data from past sales within the “appropriate market” of comparable actual business sales to reach a suported conclusion)  In other words, the subject business  is assumed not to have actually been sold, rather, it is assumed (at least as of the effective date of the appraisal for purposes of the analysis) that title is retained. Title will eventually transfer but for purposes of the assignment, title is assumed to have been retained.

To substantiate a determination of FMV presented in the Appraisal Report, the Appraiser must base such an opinion on past comparable sales which exhibit the market characteristics as stipulated in the above definition of FMV.

 

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