Fair Market Value – what does it mean? Business Valuation Standards of Value Terminology

Fair Market Value is one of several standards of value terminology used in business valuations. The Fair Market Value (FMV) term is used by the IRS in estate and gift taxes, can be found in many buy-sell agreements, and is frequently the standard of value used in a business valuation report. Anyone who reads a business valuation report by an accredited professional will likely see the Standard of Value stated in the opening pages and in conjunction with the business value conclusion.

One of the most broadly accepted definition of Fair Market Value comes from IRS Revenue Ruling 59-60 which states Fair Market Value as:

…the price 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.

For gift and estate tax purposes, the same Fair Market Value definition can be found in the Internal Revenue Code Section 20.2031-1 and Section 25.2512-1 respectively.

…the price at which (such) property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

When the term Fair Market Value is used in a buy-sell agreement, it should be noted that, the term FMV includes any discounts which may be applicable to the subject interest being valued, unless clearly stated otherwise in the agreement. For example, a less than 50% interest may be subject to discounts related to control and/or marketability. If the buy-sell agreement states Fair Market Value, the buy-sell agreement should also specifically state whether any discounts to value are intended.

In addition to Fair Market Value, other common Standard of Value terms are listed below.

Standard of ValueWhere defined:
Fair Market ValueIRS Revenue Ruling 59-60; Treasury Regulations
Fair Value (dissenting SH, minority oppression cases)Minority oppression statutes, CCC §2000.  Study case law to determine how interpreted.
Fair Value (financial reporting)FASB, SEC.
Investment ValueInternational Glossary of BV Terms.  When the buyer is known (not hypothetical).

For more information on business valuations or exit planning, Email Louis Cionci at LCionci@exitstrategiesgroup.com or call him at 707-781-8582.