Determining the Fair Market Value (FMV) per share of a small business is a critical task for owners, investors, and potential buyers. Unlike publicly traded companies where the share price is updated every second on an exchange, private small businesses require a more manual, analytical approach to find their true worth.
Whether you are looking to sell your company, bring on a new partner, or issue employee stock options, understanding the math behind valuation is essential. This guide breaks down the process into actionable steps and provides a functional calculator to help you get started.
FMV Per Share Calculator
Understanding the FMV Formula
To find the value per share, we first need to determine the Equity Value of the business. The relationship is defined by this simple equation:
(Enterprise Value - Total Debt + Cash) / Total Shares = FMV Per Share
Step 1: Determine the Enterprise Value
The "Enterprise Value" is the total worth of the business operations. For small businesses, this is usually calculated using one of three methods:
- Seller's Discretionary Earnings (SDE) Multiple: Common for very small businesses. You take the net profit, add back the owner's salary and non-essential expenses, and multiply by a factor (usually 2x to 4x).
- EBITDA Multiple: For larger small businesses, you use Earnings Before Interest, Taxes, Depreciation, and Amortization, multiplied by an industry-standard multiple.
- Asset-Based Approach: Calculating the value of all tangible and intangible assets minus liabilities. This is often used for struggling businesses or those with heavy equipment.
Step 2: Adjust for Debt and Cash
When you buy a share of a company, you are buying a piece of its Equity. To get from the operational value (Enterprise Value) to the Equity Value, you must subtract what the company owes (Debt) and add back the liquid assets it keeps (Cash).
This "Net Debt" adjustment ensures that the share price reflects the actual value available to shareholders after all obligations are met.
Step 3: Account for Total Shares Outstanding
The "Total Shares Outstanding" includes all shares currently held by all shareholders, including restricted shares and sometimes "diluted" shares (options and warrants that could become shares). Dividing the total Equity Value by this number gives you the price for a single unit of ownership.
Key Factors That Influence the Value
While the formula remains the same, the inputs can change based on several qualitative factors:
- Market Conditions: Is the industry growing or shrinking?
- Dependency on Owner: If the business can't run without the founder, the FMV per share is typically lower.
- Customer Concentration: Relying on one or two big clients increases risk and lowers valuation.
- Growth Potential: Scalable businesses command much higher multiples.
Why is FMV Important for Small Businesses?
Fair Market Value is defined by the IRS as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. For small businesses, establishing this is vital for 409A valuations (for stock options), estate planning, and divorce settlements.