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.