The term “fair market value” is defined as the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell with both parties have reasonable knowledge of all relevant facts that impact the subject property’s value.
However, every buyer has different motives causing the buyer to purchase and every seller must have some compulsion to sell or they would retain, rather than sell, their valued asset. So, while we use the term Fair Market Value, we recognize that similar properties may have different values to a seller based on that seller’s “compulsions” to sell (health, retirement, debts, economic conditions, marital changes, etc.) and similar properties very well may have different value estimates for different buyers based on THEIR motivations to purchase the asset (i.e., family continuity, elimination of competitor, business investment, etc.).
Regardless of the derivation of the Fair Market Value of a property by the seller and by the buyer, the value of any business will always be based on its FUTURE EARNINGS POTENTIAL from the standpoint of the valuer. So, if the agency is being valued by its current owner for estate planning purposes or internal perpetuation issues, the future earnings potential will be based on the business’ historical trends of income and expense carried into the future with any known changes applied accordingly.
On the other hand, if the owner is retiring and selling the business to a local competitor who will close the physical location and only take the staff needed to supplement the purchaser’s location, the economies of scale attained would make the same agency worth more to the buyer at Fair Market Value than it is worth to the current owner as a Going Concern.
And, if an investor or new agent were to assume ownership, they may have an even different structure and expense factors than the previous examples, creating an even different value, albeit correct for the particular new owner of the agency.
For this reason, it is imperative that an appraiser consider the reason for the valuation as well as historical trends in the creation of future income and expense projections. This allows the appraiser to determine a fair value based on the circumstances of ownership as well as simple trend analysis.
The extensive questionnaire required and the additional questions that we ask in the course of a valuation areused to ‘tailor’ the valuation to the specific conditions of the specific agency’s valuation need. It is important to create future income and expense trends as an integral part of the creation of a valuation and you should question any income and expense projections that don’t appear accurate. REMEMBER, THE VALUE OF THE SUBJECT AGENCY IS BASED ON ITS FUTURE EARNINGS POTENTIAL! That earnings potential is based on “future” income and “future” expense projections and those projections are created as a combination of your historical trends and the known facts about the future of the subject agency which is a part of the questionnaire and should be further evaluated insubsequent questions of the target agency owners.
Valuation is an art more than a science. That’s why the simplistic “multiple formulas” have NEVER worked properly. While it’s easy to redefine a dollar value into a multiple (of anything), it is never accurate to then take the multiple created for one agency and apply it to another. Each agency is far too unique to be treated in that way.