“Fair Market Value” defined

The term “fair market value” is frequently used throughout many industries, including but not limited to business valuation and appraisals, business brokerage, mergers & acquisitions, venture capital, commercial lending, charitable contributions, and federal & state regulations. While there are many definitions to the term “fair market value”, most are very consistent and similar when it relates to a business entity. Below is a short list of the more accepted definitions for “fair market value” within the business appraisal industry:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. (1)

The amount at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. (2)

The amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale (3)

The price, as of a commodity or service, at which both buyers and sellers agree to do business. (4)

The price at which an asset or service passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts. (5)

Our objective is to maintain the standards outlined above so that fairness is preserved in business appraisals and related activities. It is very important to note that while fair market value can be viewed as a range prior to buy-sell discussions, intentions and synergies by either the seller or the buyer can skew the selling price above or below fair market value.(6)(7)(8)(9)

(1) “fair market value.” The International Glossary of Business Valuation Standards
(2) “fair market value.” Internal Revenue Service, Revenue Ruling 59-60
(3) “fair market value.” AICPA’s Valuation of Privately-Held-Company Equity Securities Issued in Other Than a Business Combination – An Overview
(4) “fair market value.” The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. 16 May. 2007. http://dictionary.reference.com/browse/fair market value
(5) “fair market value.” Dictionary of Business Terms. Barron’s Educational Series, Inc, 2000. Answers.com 16 May. 2007. http://www.answers.com/topic/fair-market-value
(6) value a company site:answers.yahoo.com
(7) How do you determine the value of a privately held company?Stanford.edu
(8) How to Find Out What Your Business Is Really Worth-Inc Magazine
(9) Determining the Value of a Business | SBA.gov