The Difference Between Fair Value and Fair Market Value

December 10, 2015

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Fair value (“FV”) and fair market value (“FMV”) are important terms often used in our business valuations and advisory practice. Although sometimes used interchangeably in the marketplace, FV and FMV have slight nuances that differentiate them.

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In technical terms, FV and FMV are defined as follows:

FV – In accounting terms, FV is “the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act”. This definition is normally applied in determining the level of goodwill and intangible assets for financial reporting purposes.

FMV – “The highest 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.

While although similar, what differentiates FMV from FV is that the price is determined in an open and unrestricted market. We often see FMV differentiate from FV in these two common situations:

  • Family law – In family law, FV often takes precedence. A common example is in divorce proceedings where the general aim of determining FV is to split the spouses’ assets through an equalization payment at the time of the breakdown of the marriage (each province has slight variations in this process). If the assets include a business interest, the FV of that business is determined for use in calculating the equalization payment. In this situation we begin by determining FMV. Next, depending on the jurisdiction we consider alternative value concepts in the interest of achieving a just and equitable outcome. Thus, in family law FV may differentiate from FMV.
  • Shareholder disputes – in shareholder dispute cases where oppression remedies and dissent rights may arise, FV is interpreted as a pro-rata portion of the en bloc FMV, but does not include a discount for minority interest (a reduction in the en bloc value of an asset to reflect certain disadvantages of owning a non-controlling interest). It is also possible that FV may include a premium for the forcible taking of one’s interest. The lack of a minority discount and/or the inclusion of a premium related to forcible taking are differentiating factors in FV and FMV.



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