3.10: Fair market value adjustments to tangible assets
A business valuator is usually required to report on the fair market value of a business interest. However, much of the data on which a CBV relies is drawn from the business’s financial statements, which report on the book value of assets. In determining the fair market value of the business interest, the CBV therefore needs to (a) restate the tangible assets to their fair market values and (b) find a value, if any, for goodwill. The value of goodwill is found by deducting the fair market value of all tangible operational assets, net of operational liabilities, from the enterprise value found by using the capitalized free cashflow method.
Therefore if the fair market value of the tangible assets is incorrectly stated, the value of goodwill will be incorrect. This could present problems in analysing the reasonableness of the valuation conclusion, although it should not distort the overall enterprise value at that date as value is simply being moved from tangible assets to goodwill or vice versa.
A fair market valuation report could be distorted if tangible assets are left at book values.
If there is no goodwill, the enterprise value is found using the adjusted net assets method. In this instance, any misstatement of the fair market value of tangible assets will distort the valuation conclusion.
Where the value of tangible assets is not material, or where their book values do represent a reasonable proxy for fair market values, book values are accepted. However, where values are material, e.g. land and buildings, a closer analysis is essential. A real estate or equipment appraiser may need to be engaged by the client to determine their fair market values on a stand-alone basis.
Contact MVI for assistance in understanding the value structure of your company and in determining the fair market value of the equity of your company.