Finding Hidden Value in Business Appraisals under Fair Market Value
When many owners, advisers, or deal professionals think about a business valuation, they often visualize a single number that neatly captures what a company is “worth.” In reality, a fair market value (FMV) appraisal represents a layered, interpretive process built upon assumptions, adjustments, market data, and financial analysis. The slide deck "Finding Hidden Value in Business Appraisals Under Fair Market Value" points to a core truth: an appraisal conclusion is not the whole story. Hidden value, both positive and negative, often sits beneath the surface, waiting to be uncovered by those who understand how FMV is constructed.
FMV is defined as the price at which a willing buyer and willing seller, both operating with reasonable knowledge and neither under compulsion, would agree to transact. While this definition appears straightforward, the actual determination of FMV involves major analytical components such as normalizing adjustments, working capital needs, assessment of risk, and the application of market-based earnings multiples. Each of these elements can meaningfully shift the valuation conclusion, which is why FMV should be viewed as an economic opinion supported by evidence rather than an unchangeable fact.
A major source of hidden value emerges during the process of normalizing financial statements. Business owners often operate in ways that are efficient or logical for their personal situation but not reflective of how a hypothetical market buyer would run the company. Adjusting financials to reflect a market-based reality is essential for uncovering the business’s true earning power. In many cases, owner compensation must be normalized to reflect what it would cost to hire an equivalent manager at market rates. Non-recurring or unusual expenses such as legal fees, large one-time repairs, or temporary disruptions must be identified and removed to avoid understating profitability. Additionally, related-party transactions, such as rents paid to an owner’s separate real estate entity or compensation to family members, must be corrected to reflect what an independent third party would pay. Even non-operating assets and liabilities, like excess cash or personal items on the books, can distort value if not properly separated from the company’s operating results. The accuracy of these adjustments can dramatically alter the valuation, which is why appraisers emphasize careful justification for each one.
Working capital requirements (WCR) are another frequently misunderstood driver of hidden value. A business with strong EBITDA can still have limited economic value if it requires substantial working capital to function. For example, a distributor or contractor may need significant inventory or extended receivables to operate, tying up cash that could otherwise support growth or debt service. On the other hand, companies with subscription models or software products often operate with negative working capital, creating a natural cash-flow advantage that increases enterprise value. Assessing WCR accurately reveals whether the business truly generates free cash flow, which in turn affects both valuation and lender confidence. A thorough understanding of working capital helps expose where value is being created or concealed.
Risk assessment also plays a fundamental role in shaping FMV. The cost of capital (expressed through discount and capitalization rates) reflects the perceived uncertainty associated with future earnings. Appraisers evaluate a wide range of factors, including management depth, customer concentration, industry stability, competition, and financial leverage. Even subtle differences in perceived risk can significantly change value because small shifts in discount rates produce large differences in present value calculations. In small and mid-sized businesses, where company-specific risk is often heightened, this component of the appraisal requires especially thoughtful analysis. Understanding how an appraiser arrived at a particular risk premium helps owners and advisers identify potential opportunities to strengthen operations and enhance value long before a sale or financing event.
Market multiples, typically drawn from private transaction databases or public company data, are another important input to FMV. Although these multiples provide insight into what real buyers are paying, they usually reflect a wide range of observed values rather than one universal number. A business might appear to fall within a general range such as, four times EBITDA, but the true market range could be much broader depending on factors like growth, margins, recurring revenue, competitive position, and reliance on key individuals. The company’s specific characteristics determine whether it should sit at the low, middle, or high end of that range. Understanding where a business fits within this continuum helps identify hidden strengths or weaknesses that may not be immediately obvious from the FMV conclusion alone.
While the slide deck focuses on fair market value, it is important to distinguish FMV from strategic value, which is often higher. A strategic buyer, such as a competitor, synergistic acquirer, or private equity group may be able to eliminate redundant costs, integrate operations, cross-sell to new customer segments, or leverage existing infrastructure. These synergies can produce additional cash flow that a purely financial buyer could not realize. As a result, the difference between FMV and strategic value can be significant. Some of the most meaningful hidden value in a business only becomes visible when viewed through the lens of strategic acquisition rather than hypothetical market scenarios.
For business owners, understanding these sources of hidden value provides a powerful advantage. It allows them to prepare more effectively for a future sale, improve their financial presentation, negotiate more confidently, and challenge valuations that misunderstand or overlook important aspects of the company’s economics. For attorneys, this deeper insight strengthens their ability to evaluate appraisal credibility in matters such as shareholder disputes, estate and gift tax matters, or divorce litigation. For bankers and SBA lenders, recognizing hidden value helps improve credit decisioning, avoid overexposure to risk, and better understand the borrower’s operational reality.
Ultimately, fair market value is only the first layer of understanding what a business is truly worth. Behind every valuation are assumptions, analyses, and contextual nuances that shape the final figure. When business owners and their advisers look beyond the headline number, they gain access to insights that can influence strategy, improve profitability, and maximize outcomes in both sale and financing scenarios.
Source: Chris Hirschfeld 2025