How to determine fair market value is a question with a definition behind it: the price a willing buyer would pay a willing seller, neither under compulsion and both informed, and for a small business that definition is worked as arithmetic the owner can do, earnings times a multiple with the assets added, and read as a range. The fair market value formula is not a single formula but that sum at the multiple the market is paying, and fair market value business figures rest on the earnings being the right earnings and the multiple being honestly chosen. This page works it on the hub's example, says what the definition asks of each input, and says where the owner's arithmetic ends and an appraiser's signed opinion begins. The free small business valuation tool on this site does the sum, with no account, and publishes no multiple.
The definition, and what it asks of the earnings
A willing buyer pays for the earnings they will actually receive, so fair market value starts from discretionary earnings normalised for the buyer: the profit plus the owner's salary, benefits, interest, depreciation and one-off costs added back, less the cost of replacing whatever the owner does that a buyer must hire; $180,000 on the hub's example before any replacement salary. Earnings that include a one-off contract, a family member paid below market or an expense the buyer will not carry are not the earnings a willing buyer pays for, and the add-backs are where an owner's number and a buyer's number first diverge. The IRS Form 8594 is where the price finally agreed is allocated across the assets at closing.
The fair market value formula: earnings times the market's multiple
Value equals normalised earnings times the multiple willing buyers are paying for businesses like this one, plus the inventory at cost and the equipment at its agreed value. On the hub's example, $180,000 at 2.5 is $450,000, $486,000 with $36,000 of inventory. The multiple is where the definition bites: it is the market's, meaning what comparable sales fetched, and an owner who enters the multiple they hope for has worked their asking price, not the fair market value. The hub publishes no multiple, so the honest method is to enter the multiples the owner has evidence for, from a broker's quote or a known sale, and read the range; the International Business Brokers Association is where the profession's own transaction reporting lives.
Fair market value business figures at a range
Because the multiple is an estimate of the market, fair market value is honestly a range: the value at the lowest multiple the owner has evidence for, the highest, and the midpoint. At 2.0, 2.5 and 3.0 on the hub's example the earnings value is $360,000, $450,000 and $540,000, and the report tool on this site prints exactly that, with the inventory and equipment added to each. A buyer's offer inside the range is a market answer; one below it is a negotiation about the earnings or the multiple; and the owner who has the range on paper knows which conversation they are in. The Small Business Administration's guide to selling a business covers the sale from there.
Where the owner's arithmetic ends and a signed opinion begins
The arithmetic above is the owner's or the buyer's own, for a listing, an offer, a partner buy-in or a plan. It is not a signed appraisal, and the situations that need one, a court, a divorce, an estate or gift tax return, a 409A for option grants, a lender's file, need an appraiser's opinion under the standards those bodies set, which this hub does not provide and refers out. The Financial Accounting Standards Board's standards, linked below, govern fair value as it appears on financial statements, which is a related but separate definition. The free tool on this site does the owner's sum; the paid plan files each valuation against the business and the date so the appraiser, when one is hired, starts from the owner's record.
Questions people ask about how to determine fair market value
What is fair market value for a small business?
The price a willing buyer would pay a willing seller, both informed and neither compelled, worked as normalised discretionary earnings times the multiple the market is paying plus inventory and equipment. $180,000 at 2.5 is $450,000 on the hub's example.
Is there a fair market value formula?
Earnings times the market's multiple plus assets, read at a range of multiples the owner has evidence for. Entering the multiple you hope for gives your asking price, not fair market value.
When do I need an appraiser instead?
For a court, a divorce, an estate or gift tax return, a 409A or a lender's file, which need a signed opinion under the relevant standards. The owner's arithmetic is for listings, offers, buy-ins and plans.