In 1959, the IRS issued Revenue Ruling 59-60(RR 59-60)– it provides the basic guidance regarding Fair Market Valueand appraising privately owned businesses. The fair market value definition used goes something like this:“…the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. In addition the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and tobe well informed concerning the property and the market for such property.” Keep in mind this is hypothetical and based on “fair” financial returns as well not necessarily a specific transaction.
There are eight factors that RR 59-60 describes in setting forth guidelines to appraising privately owned businesses – all experienced appraisers generally follow these principles. We would be more than happy to provide you a copy of RR 59-60 or answer any questions you have.