{"id":1112,"date":"2017-09-18T09:00:22","date_gmt":"2017-09-18T13:00:22","guid":{"rendered":"http:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/?p=1112"},"modified":"2020-06-08T14:55:45","modified_gmt":"2020-06-08T18:55:45","slug":"fair-market-value","status":"publish","type":"post","link":"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/fair-market-value\/","title":{"rendered":"Is Fair Market Value the Price of the Business?"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row][vc_column][alternating_content_container]\t<div class=\"alternating-content-item-wrapper bg-light\">\n\t\t\t\t\t\t\t\t\t<div class=\"alternating-content-item-image center-center\" style=\"background-image: url('https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2017\/09\/Is-fair-market-value-LG-800x533.png'); background-size: cover;\"><\/div>\n\t\t\t\t\t\t\t<div class=\"alternating-content-item-content-container\">\n\t\t\t<div class=\"alternating-content-item-inner\">\n\t\t\t\t\t\t\t\t\t<span class=\"alternating-content-item-decor\">\n\t\t\t\t\t\tBlog\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<h2 class=\"alternating-content-item-heading\">\n\t\t\t\t\t\tIs Fair Market Value the Price of the Business?\t\t\t\t\t<\/h2>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"alternating-content-item-content\">\n\t\t\t\t\t\t<p>This blog discusses\u00a0possible similarities and differences between fair market value (\u201cFMV\u201d) and price and why business valuators conclude only on fair market value.<\/p>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n[\/alternating_content_container][basic_container container_size=&#8221;container container-narrow&#8221;][vc_column_text]<\/p>\n<h4>Fair Market Value vs. Price<\/h4>\n<p>Entering into negotiations, whether you are the buyer or seller, can be daunting. The business valuator has determined a value of the business, but the offer to purchase (or sell) the business is different. Shouldn\u2019t it be the same?<\/p>\n<p>Today we discuss possible similarities and differences between fair market value (\u201cFMV\u201d) and price and why business valuators conclude only on fair market value. We will use an example of Bob selling Bob\u2019s Pizza Inc. (\u201cBPI\u201d) to Joe.<\/p>\n<p>Bob has engaged us to value BPI. We (Davis Martindale Advisory Services) have concluded the FMV of BPI is $100,000. Joe offers Bob $75,000 to purchase BPI. Bob and Joe settle at $85,000. In this example, the fair market value of BPI is higher than the price paid.<\/p>\n<h4>Fair Market Value<\/h4>\n<p>Fair market value is a\u00a0<em>hypothetical<\/em>\u00a0market that tries to best reflect the open market.<\/p>\n<p>The\u00a0<em>International Glossary of Business Valuation Terms<\/em>\u00a0defines \u201cfair market value\u201d as:<\/p>\n<p><em>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 sells, acting at arm\u2019s 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.<\/em><\/p>\n<h4>Price<\/h4>\n<p>Price is determined in an open market through negotiations between a buyer and a seller acting at arm\u2019s length (i.e., the buyer and seller are not related) that satisfies both parties. This is the only true way to know the price for BPI.<\/p>\n<p>In our example, the true price of BPI was $85,000 after it was made available for sale in the open market.<\/p>\n<h4>Differences between Fair Market Value and Price<\/h4>\n<p>Fair market value (\u201cFMV\u201d) determined by us may differ than the actual price received for the business. This does not mean we are incorrect in the value; it means there are other factors dictating price. We list several significant differences between fair market value and price below.<\/p>\n<p><strong>1) Highest Price Available<\/strong><\/p>\n<p>FMV assumes that buyers and sellers are equal in negotiating abilities, financial strengths and knowledge to determine the highest price of the business, whereas price may be influenced by uneven negotiating skills, financial strengths and knowledge.<\/p>\n<p><em>In the example above, Joe may have had stronger negotiating skills resulting in a price favourable to him.<\/em><\/p>\n<p><strong>2) Open Market<\/strong><\/p>\n<p>FMV considers all potential buyers in an open and unrestricted market. Price may be influenced lack of interested buyers, regulatory restrictions, access to financing or other reasons.<br \/>\nBob may have accepted a lower price compared to the determined FMV as he may not have had any other interested buyers, or any other qualified buyers.<\/p>\n<p><strong>3) Informed Parties<\/strong><\/p>\n<p>FMV assumes the buyer and seller are made aware of all material information and factors relevant to the value determination at the valuation date. Price can be influenced by the seller or buyer (typically the seller) having better knowledge of operations and\/or the buyer having a better understanding of financing availability, synergies in the marketplace and within the business and other factors that may influence the price that it is willing to pay.<\/p>\n<p><em>The price Joe offered Bob may differ because of additional information that became available after the valuation date.<\/em><\/p>\n<p><strong>4) No Compulsion to Act<\/strong><\/p>\n<p>Force or compulsion to act is not considered under FMV. Price may be influenced as a result of a forced or compulsive act by the buyer, seller or both.<\/p>\n<p><em>Bob may be forced to sell BPI because of health or family issues. Joe may be aware of the issues which resulted in a price favourable to Joe.<\/em><\/p>\n<p><strong>5) Cash Terms<\/strong><\/p>\n<p>FMV assumes the transaction is to be paid with cash at closing. The price may not all be cash and instead, earn-outs or other structures may be put in place.<\/p>\n<p><em>Bob may have wanted a cash transaction to walk away from BPI. Joe may have been the only buyer to offer cash for BPI shares. Other buyers have offered Joe an earn-out or share redemption over time.<\/em><\/p>\n<p><strong>If you have any questions on FMV versus price, please feel free to <a href=\"http:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/services\/business-valuation-services\/\">give us a cal<\/a>l.<\/strong>[\/vc_column_text][\/basic_container][\/vc_column][\/vc_row][vc_row][vc_column][basic_container container_size=&#8221;container container-narrow&#8221;]<div class=\"templatera_shortcode\"><div class=\"vc_row wpb_row vc_row-fluid\"><div class=\"wpb_column vc_column_container vc_col-sm-12\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><div class=\"basic-container row   \" >\n\t<div class=\"bg-overlay none\"><\/div>\n\t<div class=\"container\">\n\t\t\t<div class=\"text-left\">\n\t\t<a class=\"general-button btn  btn-info \" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/subscribe\/\" rel=\"\" target=\"\" title=\"Subscribe\">\n\t\t\tSubscribe to Davis Martindale's Valuation Blogs\t\t<\/a>\n\t<\/div>\n\n\t<\/div>\n<\/div>\n<\/div><\/div><\/div><\/div><div class=\"vc_row wpb_row vc_row-fluid\"><div class=\"wpb_column vc_column_container vc_col-sm-12\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><div class=\"basic-container row   \" >\n\t<div class=\"bg-overlay none\"><\/div>\n\t<div class=\"container\">\n\t\t\n\t<div class=\"wpb_text_column wpb_content_element\" >\n\t\t<div class=\"wpb_wrapper\">\n\t\t\t<h4><strong>Author<\/strong><\/h4>\n\n\t\t<\/div>\n\t<\/div>\n\n\t<\/div>\n<\/div>\n<\/div><\/div><\/div><\/div><div class=\"vc_row wpb_row vc_row-fluid\"><div class=\"wpb_column vc_column_container vc_col-sm-12\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><div class=\"basic-container row   \" >\n\t<div class=\"bg-overlay none\"><\/div>\n\t<div class=\"container\">\n\t\t<div class=\"vc_empty_space\"   style=\"height: 25px\"><span class=\"vc_empty_space_inner\"><\/span><\/div><div class=\"vc_row wpb_row vc_inner vc_row-fluid\"><div class=\"wpb_column vc_column_container vc_col-sm-3\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><!DOCTYPE html PUBLIC \"-\/\/W3C\/\/DTD HTML 4.0 Transitional\/\/EN\" \"http:\/\/www.w3.org\/TR\/REC-html40\/loose.dtd\">\n<html><body><div class=\"wpb_single_image wpb_content_element vc_align_center wpb_content_element\">\n\t\t\n\t\t<figure class=\"wpb_wrapper vc_figure\">\n\t\t\t<div class=\"vc_single_image-wrapper vc_box_border  vc_box_border_grey\"><img decoding=\"async\" class=\"vc_single_image-img \" src=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Ron-Martindale-02-2020-200x200.jpg\" width=\"200\" height=\"200\" alt=\"Head shot of Ron\" title=\"Ron Martindale - Valuation &amp; Litigation Partner - Davis Martindale\" loading=\"lazy\"><\/div>\n\t\t<\/figure>\n\t<\/div>\n<\/body><\/html>\n\n\t<div class=\"wpb_text_column wpb_content_element\" >\n\t\t<div class=\"wpb_wrapper\">\n\t\t\t<h5 style=\"text-align: center;\"><a href=\"http:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/team-members\/ron-martindale\/\">Ron Martindale<\/a><\/h5>\n<p style=\"text-align: center;\">BASc, CPA, CA, LPA, CBV, CFF<strong><br \/>\nPartner<br \/>\nValuation &amp; Litigation<\/strong><\/p>\n\n\t\t<\/div>\n\t<\/div>\n<\/div><\/div><\/div><div class=\"wpb_column vc_column_container vc_col-sm-3\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><\/div><\/div><\/div><div class=\"wpb_column vc_column_container vc_col-sm-3\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><\/div><\/div><\/div><div class=\"wpb_column vc_column_container vc_col-sm-3\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\"><\/div><\/div><\/div><\/div>\n\t<\/div>\n<\/div>\n<\/div><\/div><\/div><\/div><\/div>[\/basic_container][vc_empty_space][basic_container][vc_column_text]<strong>Information Sources<\/strong><\/p>\n<ol>\n<li>Business Valuation \u2013 Howard E. Johnson (2012)<\/li>\n<\/ol>\n<p>[\/vc_column_text][\/basic_container][vc_empty_space]<div class=\"templatera_shortcode\"><div class=\"vc_row wpb_row vc_row-fluid\"><div class=\"wpb_column vc_column_container vc_col-sm-12\"><div class=\"vc_column-inner\"><div class=\"wpb_wrapper\">\t<div class=\"row\">\n\t\t<div class=\"general-cta background-image-loading   image   bg-center\"  data-src=\"<149:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-450x150.jpg,<319:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-960x320.jpg,<479:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-1440x480.jpg,<767:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-1600x533.jpg,<991:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-1600x533.jpg,<1199:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-1600x533.jpg,<1399:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-1600x533.jpg,>1400:https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/03\/Valuations-Group-8x2.75-1-1600x533.jpg\">\n\t\t\t\t\t\t<div class=\"general-cta-overlay overlay-primary\"><\/div>\n\t\t\t<div class=\"container\">\n\t\t\t\t<div class=\"row\">\n\t\t\t\t\t<div class=\"general-cta-box\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"general-cta-content\">\n\t\t\t\t\t\t\t\t<h2 style=\"text-align: center;\">Work With Us<\/h2>\n<p style=\"text-align: center;\">Our Valuation Advisors are ready to have<br \/>\na personalized discussion with you.<\/p>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"general-cta-button\">\n\t\t\t\t\t\t\t\t<a href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/services\/business-valuation-and-litigation\/\" target=\"\" class=\"btn btn-primary \" title=\"Business Valuation Services\">\n\t\t\t\t\t\t\t\t\tLearn More\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t    \t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div><\/div><\/div><\/div><\/div>[vc_empty_space][basic_container]<div class=\"post-listing blogs-items blogs-no-category-sidebar blogs-items-layout-\"\">\r\n\t\t\t\t\t\t\t\t\t<a class=\"post-listing__item\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/valuation-earnings-adjustments\/\">\r\n\t\t\t\t<div>\r\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"post-listing__item__image\" style=\"background-image: url(https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/08\/Valuation-Earnings-Adjustments-LG-622x622.png)\"><\/div>\r\n\t\t\t\t\t\r\n\t\t\t\t\t<h2 class=\"h3 post-listing__item__title\">\r\n\t\t\t\t\t\tUnderstanding Valuation Earnings Adjustments\t\t\t\t\t<\/h2>\r\n\r\n\t\t\t\t\t\r\n\t\t\t\t\t<p>Valuations are prepared on the notion that value is prospective; in other words, the value of a business or asset is based on the returns ...<\/p>\n\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t<span class=\"btn btn-primary btn-sm post-listing__item__button\">Read More<\/span>\r\n\t\t\t\t\t\t\t<\/a>\r\n\t\t\t\t\t\t\t\t<a class=\"post-listing__item\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/business_valuation_engagement_joint_retainer\/\">\r\n\t\t\t\t<div>\r\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"post-listing__item__image\" style=\"background-image: url(https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/06\/Engagement-Process-Part-2-768x768.png)\"><\/div>\r\n\t\t\t\t\t\r\n\t\t\t\t\t<h2 class=\"h3 post-listing__item__title\">\r\n\t\t\t\t\t\tThe Process of a Business Valuation \u2013 Engagement by Multiple Parties\t\t\t\t\t<\/h2>\r\n\r\n\t\t\t\t\t\r\n\t\t\t\t\t<p>Chartered Business Valuators (\u201cCBV\u201d) are often jointly retained by parties in an attempt to identify and resolve issues in dispute. When properly conducted, joint engagements ...<\/p>\n\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t<span class=\"btn btn-primary btn-sm post-listing__item__button\">Read More<\/span>\r\n\t\t\t\t\t\t\t<\/a>\r\n\t\t\t\t\t\t\t\t<a class=\"post-listing__item\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/business_valuation_engagements\/\">\r\n\t\t\t\t<div>\r\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"post-listing__item__image\" style=\"background-image: url(https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/app\/uploads\/2020\/06\/Engagement-Process-Part-1-747x747.png)\"><\/div>\r\n\t\t\t\t\t\r\n\t\t\t\t\t<h2 class=\"h3 post-listing__item__title\">\r\n\t\t\t\t\t\tThe Process of a Business Valuation \u2013 Engagement by One Party\t\t\t\t\t<\/h2>\r\n\r\n\t\t\t\t\t\r\n\t\t\t\t\t<p>You\u2019ve decided to engage a Chartered Business Valuator (\u201cCBV\u201d) to value your business. Perhaps you\u2019re looking to\u00a0sell your business\u00a0and want to get an idea what ...<\/p>\n\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t<span class=\"btn btn-primary btn-sm post-listing__item__button\">Read More<\/span>\r\n\t\t\t\t\t\t\t<\/a>\r\n\t\t\r\n\t\t\t\t\t<div class=\"blogs-paging\">\r\n\t\t\t\t<div class=\"nav-previous\"><\/div>\r\n\t\t\t\t<div class=\"blog-page-count\">\r\n\t\t\t\t\t<a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/\">1<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/2\/\">2<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/3\/\">3<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/4\/\">4<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/5\/\">5<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/6\/\">6<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/7\/\">7<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/8\/\">8<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/9\/\">9<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/10\/\">10<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/11\/\">11<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/12\/\">12<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/13\/\">13<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/14\/\">14<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/15\/\">15<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/16\/\">16<\/a><a class=\"page-count-link\" href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/17\/\">17<\/a>\t\t\t\t<\/div>\r\n\t\t\t\t<div class=\"nav-next\"><a href=\"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/wp-json\/wp\/v2\/posts\/1112\/page\/2\/\" >Next<\/a><\/div>\r\n\t\t\t<\/div>\r\n\t\t\t<\/div>\r\n[\/basic_container][vc_empty_space][\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"Blog The Benefits and Pitfalls of Jointly Retained Engagements This blog outlines the six important steps to your business valuation engagement with Davis Martindale Advisory Services. You\u2019ve decided to engage a Chartered Business Valuator (\u201cCBV\u201d) to value your business. Perhaps you\u2019re looking to\u00a0sell your business\u00a0and want to get an idea what it may be worth. [...]","protected":false},"author":2,"featured_media":2945,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-1112","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-valuation-blog"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.9 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Is Fair Market Value the Price of the Business? - Davis Martindale Blog<\/title>\n<meta name=\"description\" content=\"This blog discusses similarities and differences between fair market value (\u201cFMV\u201d) and price and why business valuators conclude only on fair market value.\" \/>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Is Fair Market Value the Price of the Business? 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