Do you have business assets? If you’re running a small business, you likely have many tangible and intangible assets. And when you sell those assets or buy new ones, you should know their fair market value.
You must know the fair market value of your assets to maintain accurate small business accounting books, obtain outside investing, and sell your property. And, you should know the fair market value of assets you are interested in purchasing to avoid overpaying.
What is fair market value?
Fair market value is the price an asset would sell for in the current market. Conducting a fair market value analysis shows buyers and sellers what an asset is worth in current market conditions. An asset’s fair market value can be higher, lower, or equal to what you purchased it for.
Whereas an asset’s fair market value fluctuates with the open market, an asset’s book value is how much you purchased an asset for (minus depreciation). You record book value on your small business balance sheet. Knowing an asset’s book value vs. market value helps you determine whether an asset’s value has increased or decreased.
The purpose of a fair market analysis
You might consider doing a fair market analysis on an asset when selling it. That way, you know the buyer is offering a fair price for it. And, you can also do a fair market analysis on an asset you want to purchase.
A fair market valuation doesn’t necessarily mean you want to sell or purchase assets. Generally, there is no pressure to buy or sell after a fair market valuation.
You can do a fair market valuation to satisfy investors or lenders, generate insurance claims, to calculate taxes, or when filling out IRS forms.
Fair market valuations are essential when obtaining outside financing. Investors and lenders want to know how much your assets and business are worth before giving you money.
Insurance companies may also be interested in the fair market valuation of assets you want to insure. Most insurance claims are based on a percentage of the insured item’s fair market value, not the price you originally paid for it.
Some tax assessments are also based on fair market values. For example, property tax is partially based on the fair market value of the property.
Do you donate business assets to charities? If you want to claim small business charitable donations as a tax deduction, you must record the asset’s fair market value on your business return.
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How to determine fair market value of assets
If you determine that a fair market valuation is crucial in your small business, you need to know how to conduct one. Here are some tips to determine the fair market value of assets:
1. Gather information
Before conducting a fair market valuation, you should have an adequate amount of information on the asset. You should know the asset’s purchase price, age, popularity, and scarcity.
First, begin with the asset’s purchase price. How much was it originally worth? If the asset is your property, look for proof of purchase (i.e., the original receipt) in your records. If you are looking to buy an asset, ask the seller for a copy of the original receipt.
Next, consider how old the asset is. When was it originally purchased? And, ask yourself how many asset alternatives there are on the market.
2. Do a comparison
To do a fair market valuation, you need to compare the asset to other assets on the market.
There are two questions you should ask when doing a comparison:
- What are similar assets valued at?
- How much would it cost to replace the asset?
However, there are many other factors that set your assets apart from other assets on the market. As a result, you should take the answers to the above two questions with a grain of salt.
3. Consult a professional
When evaluating an asset, bring in some outside help. Get advice from people who are considered experts in the industry. They can provide input about the asset’s condition.
You can also hire an appraiser to determine the fair market value of property. Before choosing an appraiser, do research to find the best one for the valuation.
When you’re conducting a fair market valuation or managing your books, you need to have the records to back it up. Check out Patriot’s online accounting software for an accurate and affordable recordkeeping system. Plus, we offer free, USA-based support. Get your free trial now!
This article has been updated from its original publication date of August 13, 2015.
This is not intended as legal advice; for more information, please click here.