Standards of Business Valuation

While different standards of valuation are used for different purposes, the correct standard of business valuation for federal tax purposes is fair market value. This chapter discusses the nuances of fair market value. The definition of fair market value is found in Treasury materials and has been refined over the years by the many courts that have dealt with the issue. Generally, three approaches are used to determine the fair market value of a business or business interest: the market approach, the income approach, and the asset-based approach.The market approach values a business interest based on the market price of comparable interests. The income approach computes the present value of the estimated future cash flows of the business. The asset-based approach examines a company's assets and liabilities to assess a value. In a fair market value analysis, one must make an underlying assumption regarding the facts and circumstances of the subject or transaction being valued. The various assumptions that influence the valuation are value as a going concern, value as an assemblage of assets, and value as an orderly disposition, and value as a forced liquidation.