Understand the Difference Between Fair Market Value, Fair Value and Investment Value
Applying the proper standard of value is critical when a valuation specialist estimates the value of a company, interest or asset. This is because there can be significant differences in value depending on the standard of value used.
Also, applying the wrong standard of value will likely subject the valuation analysis/report to challenge by the IRS (for tax-related valuations), by the courts or opposing counsel in a litigation matter, or by third party investors.
Fair Market Value (or FMV) is defined by the Treasury as, "...the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."
Under the FMV standard of value, shareholder discounts may be applied to the shares of a closely-held company if they lack all or some of the prerogatives of control over the corporation or lack of marketability. FMV is commonly applied in regulatory matters including federal and estate tax matters and, in some cases, judicial matters.
Fair Value (or FV) is generally applicable in both judicial and financial reporting matters and in certain cases where, for example, a shareholder agreement calls for FV. For judicial matters, such as divorce, shareholder dissent and oppression, there is no clear consensus on the definition; however, most view it as the value of the shares on a pro-rata basis.
Ibbotson Associates defines it as "...the amount that will compensate an owner involuntarily deprived of property. Commonly there is a willing buyer but not a willing seller, and the buyer may be more knowledgeable than the seller. Fair value is a legal term left to judicial interpretation. Many consider fair value to be fair market value without the discounts."
Fair Value for financial reporting purposes (i.e.: purchase price allocations) has a very different definition and its own set of rules under Generally Accepted Accounting Standards.
Investment Value (also referred to as Strategic Value) is defined as the value of an asset or business to a specific or prospective owner or holder of the asset or business. For example, it can represent the added value to a prospective acquirer of a business from the synergies an acquisition would bring from cost savings or increased market share.
Because of this added value, Investment Value is typically (and can be significantly) higher than Fair Market Value and Fair Value depending upon the circumstances. As trained valuation specialists, we have an in-depth understanding of the differences between the various standards of value and their application which is essential in the valuation process.
Our valuation services team members are specially credentialed as Accredited in Business Valuation (ABV) by the AICPA and also are recognized as Certified Valuation Analysts (CVA's) by NACVA (National Association of Certified Valuation Analysts).