EDITORIALFEATURE
Eight Reasons Why Fair Market
Value is Insufficient to Motivate a
Business Owner to Sell
By Jeffrey D. Jones, ASA, CBA, CBI
T
here are many reasons why business
owners decide to sell their business
such as retirement, ill health, divorce,
or partnership issues. However, if
the only motivation to sell is price, it is unlikely that buyers will pay a price that will
be sufficient to get a deal done. Often,
business owners have price expectations
based on personal reasons such as the
amount needed for another investment,
the need for lifelong retirement funds,
or replacement of income for less work.
None of these reasons are motivations
for buyers to buy. The price must be
supported by earnings derived from the
business. Due to the risk of small to midsize businesses, there are economic limits
as to the price buyers are willing to pay.
However, that price may be insufficient to
motivate sellers to sell.
5. FMV rarely will fully compensate an
owner for the time and expenses of
starting and building a profitable busi
ness.
6. The business owner frequently underestimates the systematic and
1. A business owner could make the
non-systematic risk factors that imequivalent of FMV by keeping the
pact the business and differentiates
business and its earnings for about
the small closely held business from
two years to three years and still own
the public company counterparts.
the business.
7. A more viable option may be to al2. FMV is usually inadequate for a seller
low a family member to take over the
to retire permanently.
business.
3. The business owner has heard that 8. The idea of selling is motivated by a
a close competitor received millions
short-term problem that is later refor his or her business and expects
solved.
the same price for their business even
though the earnings are not the same.
Understanding why a business owner
4. The business owner could not make wants to sell a profitable business can be
the same income elsewhere.
the key as to expectation of price and
reasonable terms of sale. Profitable businesses do sell at reasonable prices wherein the earnings support the Fair Market
Value of the business and the s [\