Fair Market Value (FMV) is best understood as value in a “fair” market. It is generally defined as:
- The highest price available…
- In an open and unrestricted market…
- Between informed and prudent parties…
- Acting at arm’s length…
- Under no compulsion to act…
- Expressed in terms of current cash…
FMV is not the same as price. FMV is a notional concept and is forward looking. An actual comparable transaction, if available and if truly comparable, provides a preferred measure of value.
FMV is a good starting point for any transactional activity. It calculates the value of the business in a fair and ideal market. Many factors will influence the final price, the main influences on price being the parties’ negotiating abilities, their need to buy or sell, the presence of strategic buyers who can achieve synergies, or the structure of the transaction (not always settled in a single lump sum payment). The FMV calculations provide a reference point during negotiations.
In cases of marital or shareholder disputes the courts will often apply “fair value” as opposed to “fair market value”, the principal difference being that “fair value” usually omits any discounts for minority positions.