4.8: Fair market value

Fair Market Value (FMV) is a term that litters many valuators’ reports, especially in Canada and the USA (other jurisdictions may use different terms such as “fair value” or “market value” to mean something similar – it is important to read the definitions section of a valuator’s report).

A sound understanding of FMV is an important precursor to understanding a valuation report.

FMV could best be described as “value in a ‘fair’ market.” i.e. it’s a theoretical concept. However, it’s the most reliable guide to value when resolving disputes and serves as an essential starting point when preparing to buy or sell a business.

FMV may be 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

Fair market value is a notional concept – it is not the same as price.

It is important to recognize that FMV is not the same as price. Look back at the definition of FMV – it is quite possible that one or more of these 6 aspects will not apply in a real world negotiation. The price at which a business may ultimately be sold is generally determined through negotiation and is influenced by many factors, which are not usually considered in determining FMV, such as:

  • unique or unequal negotiating positions
  • non-cash settlement terms
  • differing motivations for undertaking the sale
  • a relationship between the seller and the buyer

Contact MVI to discuss how we can help you determine the FMV of your business.