Business Valuation 595buyers. Also, financial buyers often have an exit strategy to sell their in-
vestment at some time in the future. They usually pay fair market value
(def ined next).- Strategic/investment buyers.These buyers probably already know the
company or already operate in its industry. Therefore, the number of
strategic buyers for a particular business is typically more limited than
the market of financial buyers. A strategic buyer is usually looking at in-
tegrating its operations with the purchased business. Most of these buyers
will pay a price that ref lects certain synergies that are not readily avail-
able to financial buyers. This price is called investment value, which is
different than fair market value.
The smallest of businesses, sometimes called “mom and pop businesses,”
often have two other groups of buyers—lifestyle buyers and buyers of employ-
ment. A lifestyle buyer is looking to acquire a business that gives him or her a
desired lifestyle (e.g., a motel in the mountains). Another group of buyers of
small businesses is primarily motivated to provide employment for the buyer
and /or the family.
Among strategic and financial buyers, strategic buyers will usually pay a
higher price because of the anticipated synergies between the two businesses.
After explaining the different types of buyers to Bob, Victoria discusses
how it applies to ACME. Obviously, Bob would like to obtain the highest price
possible if he sold his business. However, Victoria has no way to foresee who
that buyer may be or that buyer ’s strategic motives for buying ACME. There-
fore, she is going to determine what a financial buyer would likely pay—the
company’s “fair market value.” Practically, determining the fair market value
will assist Bob in establishing a target minimum price to accept when selling
ACME. If Bob can locate a particular strategic buyer who would pay a strate-
gic price (or investment value), he will try to obtain a higher price.
Bob asks Victoria to explain fair market value and how it differs from in-
vestment value. She tells him that fair market value is defined as “the pr ice, ex-
pressed in terms of cash equivalents, at which property would change hands
between a hypothetical willing and able buyer and a hypothetical willing and
able seller, acting at arm’s length in an open and unrestricted market, when
neither is under compulsion to buy or sell and when both have reasonable
knowledge of the relevant facts.”^1 Fair market value contemplates what the
“market” will pay. Investment value is the price a specific investor would pay
based on individual requirements and expectations. It frequently ref lects a
higher price for the unique synergies between the buyer and company.
AN OVERVIEW OF THE BUSINESS
VALUATION PROCESS
Victoria explains to Bob that a complete business appraisal is both a quantita-
tive and qualitative process involving a risk and investment return analysis. A