4.20: “Price” as used in valuators’ reports
CBVs make a clear distinction between “price” and “fair market value.” Fair market value is a notional term that is theoretical and somewhat idealistic. It represents value in a fair world and anyone older than 6 months knows that the world is seldom fair. “Price” on the other hand, is rooted in the real world and represents the actual amount at which a business changed hands. It does not appear often in a valuator’s report.
Price is the amount at which a business sells. This is not often the same as fair market value.
Non-CBVs are sometimes heard to say that the real value of a business is the amount at which it is sold. While this statement makes sense, the problem with that comment is that it would only be true that price = fair market value if:
- the business had been exposed to every possible buyer, all of whom had the ability to buy the business, and
- all possible buyers were privy to the same information as the seller, and
- all possible buyers were acting rationally, and
- there were no non-arm’s length relationships between the seller and possible buyers, which could distort their negotiations, and
- the buyer offering the highest amount secured the deal, and
- the buyer settled the purchase amount in full at the date of the sale.
Negotiating a price for a business is a lot easier if you know its fair market value. Knowing the price at which similar businesses have sold may help to influence the development of the FMV of a business but the CBV will need to take account of any differences between the business being valued and those that make up the comparative sample.
Contact MVI for questions about specific industry terminology.