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not include assets that the firm has created through internal activity, such as goodwill and other
intangible assets. Once all the firm‟s assets and liabilities have been identified, each item is valued.
Different Types of Buyers
Victoria explains to Bob that buyers have different motives for buying businesses. They may be
willing to pay different prices for the same business depending on their motive. Most buyer motives
can be grouped into these categories:
• Financial buyers. These buyers are mostly motivated to earn a reasonable return on their
investment. Financial buyers often have a wide range of investment options, because they seek
financial returns on whatever sort of investment they make. Furthermore, financial buyers are
also often focused on an exit strategy to sell their investment in the future. Finally, those sorts of
buyers usually pay fair market value (defined later).
• Strategic/investment buyers. These buyers probably already know the firm or already
operate in its industry. Therefore, the number of potential strategic buyers of a firm is usually
smaller than the number of financial buyers. A strategic buyer is often looking to integrate its
operations with the target firm. Most of these sorts of buyers will pay a higher price that reflects
business synergies that are not available to financial buyers. This price is called investment value,
which is different than the concept of fair market value.
The smallest of businesses—sometimes called mom-and-pop businesses—often have two other
types of buyers with different motives: lifestyle buyers and those seeking employment. A lifestyle
buyer wants to buy a business that provides a desired lifestyle (e.g., a motel in the mountains or a
business that complements a hobby). Another type of buyer of small businesses is motivated to
provide employment for the buyer and/or family members.
After explaining the different types of buyers to Bob, Victoria discusses how they apply to Acme.
Obviously, Bob would like to obtain the highest price possible if he sold his business. Neither Bob nor
Victoria, however, has any way to foresee who that buyer may be or that buyer‟s strategic motives for
buying Acme. Therefore, Victoria is going to estimate what a financial buyer would likely pay—the
firm‟s fair market value. Practically, determining the fair market value will help Bob set a minimum
target price to accept when selling Acme. But if Bob can find a strategic buyer who would pay a
higher price, he would, of course, prefer to do that.
Bob asks Victoria to explain fair market value and how it differs from investment value. She tells
him that fair market value is commonly defined as “the price, expressed 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 The idea of fair market value is what the market of buyers and sellers would agree on as a
price. Alternatively, investment value is the price a specific buyer would pay based on that buyer‟s
needs and expectations. It often reflects a higher price than fair market value because of unique
synergies between the buyer and target firm. But, as discussed earlier, investment value requires some
idea of a specific buyer.