Everything has a price, but the value of a particular asset is not set in stone and may fluctuate considerably over time. The current market value, also known as fair market value, is what an item will sell for on the open market. Determining the current market value of securities, such as stocks and bonds, is simple: Look up the information online to find out what the security sold for on that day's trading. When it comes to non-liquid assets, such as real estate, art, antiques, fine jewelry, small businesses and the like, a little more work is involved, and you may need to bring in professionals.
Fair Market Value
The IRS defines fair market value as the price on the open market agreed to by a willing buyer and a willing seller. For example, if you have a car to sell, you'll need to know how much buyers are willing to pay for a vehicle of the same make, year, mileage and condition. If you don't do your homework, you'll either price the car too high and not find a buyer or price it too low and lose money on the sale. For motor vehicles, the best way to find out the current market value is by checking online auto pricing guides like Kelley Blue Book or Consumer Reports.
Appraisals and Valuation
Determining the current market value of certain types of property requires an appraisal performed by a certified appraiser. Assets such as art, antiques and jewelry require appraisal by experts in their specific fields to accurately determine current market value. And this is especially true in real estate transactions. The real estate appraiser determines the current market value of a property by researching sale prices of comparable properties that sold recently in the same area. The value is affected by current market conditions, which is basically a question of supply and demand. Unique features of the property, both positive and negative, also affect the appraisal, as do zoning regulations in the area. Real estate is also valued using the concept of highest and best use, which is the legal, reasonable and probable use of improved or vacant land.
If you're looking into buying or selling a business, establishing fair market value is a bit harder. You'll need to find out the business' sales, gross profit margin and operating expenses. With these figures, you can determine how much profit a business brings in before taxes. You must also take into account any assets the business has, such as inventory and equipment. If the business' real estate is part of the equation, a commercial real estate appraiser can give you that value.
With businesses, there are also intangible assets, such as the firm's reputation, the number of regular customers and its name recognition. That entire package is collectively known as goodwill. Valuation of goodwill comes down to earning capacity. The evaluation of a business depends on the expectation that it will continue to attract customers, and part of this expectation is based upon name recognition, reputation in the community and other intangible factors.
- IRS: Publication 561 (4/2007), Determining the Value of Donated Property
- TD Bank: Valuing a Business
- Social Security Administration: SI 01150.005 Determining Fair Market Value
- Appraisal Today: Residential Highest and Best Use Analysis: More than Just a "Check Box" - Reviewers and state boards want to see more explanation
- Consumer Reports: How Much Is the Used Car Really Worth?
- The Tax Adviser: Goodwill as Part of a Corporate Asset Sale