How to determine fair market value, and why the definition is the hard part
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Fair market value has a settled definition and a great deal of argument inside it: the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion, both reasonably informed. Every word in that sentence does work, and most disputes are about one of them rather than about arithmetic. This page sets out what the standard means, where it is required rather than chosen, and what it takes to support a figure that somebody else will test.
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The definition, clause by clause
A willing buyer and a willing seller means a hypothetical pair rather than the two people actually in the room, so a particular buyer's special reasons for paying more are excluded. Neither under compulsion removes the forced sale and the desperate purchaser. Reasonably informed assumes both know what diligence would reveal. The result is deliberately impersonal: fair market value is not what you can get, it is what the market would pay in ordinary conditions.
A fair market value formula, and why there is not really one
What exists is a method rather than a formula: establish the earnings base, choose the approach or approaches the asset justifies, apply evidence from comparable transactions or from a required return, and then apply any discount the interest itself carries. A minority holding is worth less per share than control, and an interest that cannot easily be sold is worth less than one that can. Those two adjustments are where most of the disagreement in a real valuation lives.
Where fair market value business valuations are required rather than chosen
Tax filings, gifts and estates, employee share plans, disputes and some regulated transactions all require the standard specifically, which is why the purpose of a valuation decides its standard and the standard decides the number. In healthcare, where referrals are involved, the definition is written into the rules themselves and explicitly excludes the value a party would attribute to the referral relationship (42 CFR 411.351).
What it takes to support a figure somebody will test
Evidence, stated assumptions and a date. The earnings you started from and every adjustment with its documentation. The comparable transactions or the return you applied, and why those and not others. The discounts taken and the reasoning. The effective date, because a figure with no date describes nothing. A number without those is an opinion, and an opinion is what the other side's adviser is paid to take apart.
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How to determine fair market value: common questions
Is fair market value the same as what a buyer will pay?
No, and the gap is the point. A strategic buyer may pay more because the business is worth more inside theirs, which is investment value rather than fair market value. A seller in a hurry may take less. Fair market value is the impersonal benchmark both of those are measured against, which is why it is the standard that tax and disputes use.
What does a fair market value formula look like in practice?
Earnings base, method, evidence, adjustment, date. The arithmetic is short. The work is in normalising the earnings, in justifying which comparable transactions are genuinely comparable, and in supporting any discount for lack of control or marketability, which is where two competent valuers most often differ.
Who can determine fair market value?
Anybody can form a view and only a supportable one survives a challenge. Where the figure will be filed, disputed or relied on by a third party, it is worth having it prepared by somebody who will sign it and whose qualifications are stated in the report, because that is what makes it evidence rather than an assertion.
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