The FMV is the sale value at which a going concern business would change hands between a willing buyer and a willing seller, when the buyer is not under any compulsion to buy and the seller is not under any compulsion to sell, and where both parties have a reasonable knowledge of the relevant facts.
The majority of SME businesses in the New Zealand market will be appraised by a Business Broker or an accountant, using the ‘Capitalisation of Future Maintainable Earnings’ (FME) methodology or a similar valuation method. We assume that a SME is a business that offers a return on investment after an owner’s salary, and in most cases, has a management structure.
Capitalisation of FME in simple terms involves calculating the following:
The net surplus figure for your business, quoted in most cases either as EBIT (Earnings Before Interest and Tax), EBITDA (Earnings Before Interest, Tax, Depreciation or Amortisation) or SDE (Sellers Discretionary Earnings) with SDE being most often used for owner operator sized businesses.
This figure is often based on an average of the last three years’ performance of the business, and in some cases, only on the current year should the business be either growing or declining.
A multiple (or Capitialisation rate) is then set based on comparative sales and any positive or negative factors which could influence the businesses ability to earn that return going forward.