Meaning
Estimated price at which an asset would change hands between a willing buyer and a willing seller. This reasonable market value is used to price shares for tax purposes or to determine the buyout price of a departing founder. It assumes that both parties have reasonable knowledge of the relevant facts and are under no compulsion to buy or sell.
In private companies, this figure is often difficult to pin down because no public exchange for the stock exists.
Valuation Methodology
Appraisers use several methods to reach this figure, including discounted cash flow analysis or comparisons to recent funding rounds. The record of these calculations for the reasonable market value serves as a defense against claims of self-dealing or tax evasion. Because the value is an estimate, different experts might reach different conclusions based on their assumptions about future growth.
The final number is a point of negotiation rather than a fixed truth found in an appraisal.
Dispute Resolution
When two founders disagree on the worth of the firm, the reasonable market value becomes the benchmark for a resolution. A formal valuation report provides a professional opinion that can survive scrutiny in a ruling. Without such a record, the parties are left to argue over subjective memories of what the business was worth at a specific time.
This often leads to prolonged conflict and higher costs for everyone involved.
Temporal Nature
Value fluctuates with the market and the health of the venture. A dated appraisal of reasonable market value captures a specific moment in time.
