Fair Market Value
The fair market value (FMV) world hypothetically embodies the value of a business interest. In terms of standards and process, FMV is the most structured value world. Examples include estate and gift appraisal, tax court cases, and the valuation of employee stock ownership plans (ESOPs). In some states, FMV is also the standard of value for equitable distribution cases. Finally, since FMV is so well established, it is often the default value world. Yet it is not the correct world in every valuation situation.
Fair market value is defined as:
The price at which the property would change hands between a willing buyer and a willing seller when the buyer is not under any compulsion to buy and the seller is not under any compulsion to sell, and both parties have reasonable knowledge of relevant facts. The hypothetical buyer and seller are assumed to be able and willing to trade and to be well informed about the property and concerning the market for such property.1
The “price” in the definition implies the value is stated in cash or cash equivalents. The “property” is assumed to have been exposed in the open market for a period long enough to allow the market forces to establish the value. The “willing buyer and seller” assumes an equal motivation between the hypothetical, but rational, parties. Finally, the derivation of FMV should follow a process that yields a likely point-in-time value, not a range of values. This value is concerned with the financial ...