Chapter 1

Standards of Business Valuation


To determine the value of a business, one must first define the meaning of value. Although there are various definitions of value, the exclusive definition for federal tax purposes is found in the term fair market value. For other purposes, other standards of value include fair value, investment value, intrinsic value, and transaction value.

Fair market value is defined by the U.S. Department of the Treasury (the “Treasury”) and involves a consideration of all relevant factors to determine value. It assumes an arms-length transaction between a willing buyer and willing seller, who are not under any compulsion to buy or sell. The buyers and sellers are hypothetical, as is the market in which the transaction takes place. Although individual characteristics of the actual transaction may occasionally be considered, they usually are not. The buyer and seller are presumed to have knowledge of reasonable, relevant facts relating to the hypothetical transaction as of a specific valuation date.

Fair value is the standard of value used in shareholder and (since the first edition of this book) some divorce suits, as well as financial accounting. In both the financial accounting and shareholder suit contexts, it is analogous to, but distinct from, fair market value and is defined by state statute, by the Financial Accounting Standards Board (FASB) and Generally Accepted Accounting Principles (GAAP). Fair value, as used by the accounting profession ...

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