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When we perform a valuation of a business, in essence we are determining the fair market value (“FMV”). Under valuation terms, FMV is defined as:
“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.”
FMV is based on a notional market (i.e., one that is determined without exposing a company for sale in the open market). The price paid for a company in the open market may differ from FMV determined in a valuation due to factors such as the negotiating strengths, differing levels of motivation to complete the transaction and non-cash considerations.
As a result of these factors, the actual selling price of the business or entity may be higher or lower than the notional FMV determined in a valuation.