What does fair market value mean?
The IRS defines fair market value as the price property would sell for on the open market: the price a willing buyer and a willing seller would agree on, with neither required to act and both having reasonable knowledge of the relevant facts 1. The same test appears in the federal estate tax regulations 2 and in Revenue Ruling 59-60, which the IRS issued in 1959 3.
The definition describes a sale, not a formula. A number no informed buyer would pay isn't the value, however carefully it was calculated.
How is a business valued?
The IRS's business valuation guidelines name three generally accepted approaches and say all three should be considered 4.
The SBA's guide for buyers lists some of the methods used in practice: a capitalized earnings approach, an excess earnings method, a cash flow method, and a tangible assets (balance sheet) method 5.
- Asset-based approach
- Starts from the value of what the business owns, net of what it owes 4.
- Market approach
- Starts from what comparable businesses, or interests in them, have sold for 4.
- Income approach
- Starts from the earnings or cash flow the business is expected to produce, converted into a value today 4.
Why does the SBA's valuation rule matter to a seller?
An SBA 7(a) loan can be used to buy a business, in whole or in part, and the maximum 7(a) loan is $5 million 6.
Under the SBA's lending rules in effect from October 1, 2026, the lender may value the business itself only when the purchase price is $350,000 or less and buyer and seller have no close relationship. Otherwise the valuation must come from an independent qualified source, requested by and prepared for the lender. A valuation prepared for the buyer or the seller can't be used 7.
The total debt supporting the purchase, including any seller debt that isn't on full standby, is limited to the business valuation amount. If the price is higher than the valuation, the buyer has to make up the difference with equity 7. A price an independent valuer won't support is hard for an SBA-financed buyer to pay.
What gets valued in an asset sale?
When a buyer purchases the assets that make up a business and goodwill or going-concern value attaches, buyer and seller both report the sale to the IRS on Form 8594 8.
The price is allocated across seven classes of assets in order: cash and deposit accounts first (Class I), then the classes that follow, including inventory (Class IV) and identifiable intangibles (Class VI), and last of all goodwill and going-concern value (Class VII) 8. Goodwill takes what's left once the other classes are allocated.
Where should I start?
A range of value opinion is where we'd start: a written range of value with the reasoning behind it, the earnings it rests on, the adjustments made, and what would move the number up or down. It's delivered in a week, and it's $1,000, fixed.
It answers whether selling now makes sense. It isn't the valuation an SBA lender orders, because that one has to be prepared for the lender 7.
This is general information, not tax or legal advice. Your attorney and CPA should confirm how it applies to your sale.
