25 Mar
My prior blog post listed some of the different definitions of “fair market value” and “fair value” often used in valuations. The definitions are quite similar so it can be difficult to understand the subtle differences between them. The following table lists some of the main differences between these two standards of value:
|
Fair market value |
Fair value |
|
|
Type of buyer and seller |
Hypothetical |
In an accounting context, both parties are market participants. In a legal context, possible consideration of whether the transaction will be fair to the seller. |
|
Willingness of parties |
Willing seller and willing buyer with no compulsion to buy or sell | In an accounting context, a market participant is assumed to be willing to enter into a transaction (no duress that would compel them to transact). In a legal context, it is often assumed the buyer is willing to buy but the seller is being compelled to sell. |
|
Knowledge of parties |
Assumption that both parties have equal knowledge about the relevant facts of the transaction | In an accounting context, the market participants are assumed to be knowledgeable to the extent that they have a reasonable understanding of the transaction based on all available information. In a legal context, there is no assumption the parties have equal knowledge of the facts. |
|
Price to be paid |
Assumes the price paid will be equitable to both parties |
The accounting definition focuses on the selling price (exit price). A legal context often assumes fairness to the seller. |
| % ownership | Applies to controlling interests or minority blocks |
The accounting guidance prohibits blockage discounts or control premiums. The legal context generally applies to minority blocks |
Being a Certified Valuation Analyst with years of valuation experience, I have a solid understanding of the differences between “fair market value” and “fair value”. Please don’t hesitate to contact me if you have any additional questions about the different standards of value or if you want to know how the differences might affect the methods or assumptions used in a valuation. I can be reached at lswanson@blue-abaco.com or 813-336-3660.
