This article are provided for information purposes only, and are not intended as legal advice.


Buying a business at fair market value

December 8th, 2008

Many people list their business for sale and want a certain price what they feel they are entitled to receive.  Is that fair market value?  Definitely not.  Fair market value is the price that a willing buyer will pay and a willing seller will accept.  It is not the asking price, it is not what you think that it is worth or how much you have invested in the business.

I have a client of mine who was selling real estate.  Someone went to a client of theirs and said that they wanted to purchase a building.  They offered less than what neigbouring businesses had been offered for similar properties.  They said that prices dropped therefore they would not offer to pay the same as they had for prior parcels which they had purchased.  They were accumulating a series of locations and this was a strategic parcel of land.  Had the value gone down?  That depended on whose point of view.  To a third party, maybe, to a strategic buyer who needed this parcel in their business plan – questionable.  Did it really go down, it was a strategic part of their strategy.  If they lost the land and building to someone else, would they have lost all the work that they had done to consolidate what they had already accomplished?  If someone else found out about the buyers plans, could they start accumulating the properties that buyer #1 needed and then ask double the price? Remember, there is a price for everything but the price that one person will pay may not be the same as another.  If a party who will receive a synergistic benefit, the property is worth considerably more than to another person who will have no economies of scale or synergies.  Is the risk of losing the property to someone else worth trying to nickel and dime the seller?  My client reminded the prospective buyer saying you approached the seller, the seller did not put the business up for sale.  They said that the real estate market had dropped but they were then told that fair market value is the price that the willing seller wants to receive and the willing buyer will pay.

If you do not have a willing seller,  then obviously you have not reached fair market value yet because they will only sell when they receive what they feel is market price.  Remember, this does not happen to everyone.  In this case, you had a specific buyer with a specific goal in mind. The business was located in a building.  The buyer wanted the land and the business or in fact the building.  Land is based on location, location and location.  It was not replaceable therefore the owner had bargaining power.

If you have a business for sale and someone can buy a similar business or one which will yield the same returns for a similar price, you may not be able to stand firm on your price if there are no other willing buyers interested in your business.


Filed under: Buy a business — Gary Landa @ 9:32 am


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