Key takeaways
- “What is my business worth?” has no single answer until you specify worth to whom, under what assumptions and for what purpose. That is the standard of value.
- Fair market value is the standard for federal tax matters and many other purposes: a hypothetical willing buyer and willing seller, neither under compulsion, both reasonably informed.
- Fair value means different things in law (shareholder disputes, often without minority or marketability discounts) and accounting (an exit price to market participants under ASC 820).
- Investment value is the value to a specific buyer, including synergies. It is often the highest number, and the one sellers hear from strategic buyers.
Two credentialed appraisers can value the same company on the same date and reach different numbers, and both can be right. The difference is usually not the math. It is the standard of value: the definition of value that the engagement requires. Choosing the wrong standard is one of the most common, and costly, errors in valuation, particularly in buy-sell agreements, divorces and shareholder disputes.
Why the standard of value matters
The standard of value determines:
- Whose perspective is assumed (a hypothetical buyer, a specific buyer, the current owner, market participants).
- Whether synergies are included.
- Whether discounts for lack of control or marketability apply.
- Which facts can be considered as of the valuation date.
It is usually set by the context: tax law, a state statute, an accounting standard, a court’s precedent or the language of a contract.
Fair market value
The most widely used standard in the United States. For federal tax purposes it is defined in the Treasury Regulations 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 sell and both having reasonable knowledge of relevant facts. Revenue Ruling 59-60 provides the long-standing framework for valuing closely held stock under this standard.
Key features:
- The buyer and seller are hypothetical, not the actual parties.
- Buyer-specific synergies are excluded.
- Discounts for lack of control and marketability are applied where supported by the facts. See discounts for lack of control and marketability.
Used for: gift and estate tax (our guide), charitable contributions, ESOPs (with related “adequate consideration” requirements), many buy-sell agreements, SBA lending and many divorce cases.
Fair value (legal / statutory)
In shareholder litigation, “fair value” is a legal standard defined by state statute and case law. It most often arises in:
- Dissenters’ or appraisal rights, when a shareholder objects to a merger or other corporate action and asks a court to determine the value of their shares.
- Shareholder oppression cases, where the remedy is often a court-ordered buyout.
Many states follow the Model Business Corporation Act, which defines fair value in appraisal proceedings in a way that generally excludes discounts for lack of marketability or minority status, so the shareholder receives a pro rata share of the company’s value. Massachusetts’ business corporation statute is based on the Model Act. Courts apply the standard differently from state to state, so case law matters. Read more in fair value in shareholder disputes.
Fair value (financial reporting)
Under U.S. GAAP (ASC 820), fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. It is an exit price from the perspective of market participants, not a specific buyer.
Used for: purchase price allocations after acquisitions (ASC 805), goodwill and intangible asset impairment testing (ASC 350), equity compensation (ASC 718) and investment company portfolio valuations. See business combination valuations and our guide to goodwill impairment for private companies.
Investment value
Investment value is the value to a particular investor based on its own requirements, cost of capital, tax position and expected synergies. A competitor that can eliminate duplicate overhead and cross-sell to your customers may pay more than a financial buyer would.
Used for: acquisition analysis, negotiation strategy, deciding whether to accept an offer and fairness analyses. Our fairness opinion services often involve comparing a proposed price with both market evidence and the investment value perspective.
Intrinsic value
Intrinsic (or fundamental) value is an analyst’s view of the “true” value based on the asset’s characteristics, independent of market price. It is common in investment analysis and appears in some court decisions, but it is rarely a defined standard in tax or statutory contexts.
Premise of value: going concern vs. liquidation
Separate from the standard, the premise describes the assumed circumstances of the sale:
- Going concern: the business continues operating. Most valuations use this premise.
- Orderly liquidation: assets are sold over a reasonable period.
- Forced liquidation: assets are sold quickly, as in an auction.
In financial distress, the premise can dramatically change value. See our article on valuation in Chapter 11 and business restructuring.
Comparison table
| Standard | Perspective | Synergies? | Minority / marketability discounts? | Common uses |
|---|---|---|---|---|
| Fair market value | Hypothetical willing buyer and seller | No | Yes, where supported | Tax, ESOP, SBA, many buy-sell agreements |
| Fair value (statutory) | Defined by state law | Generally no | Often excluded | Dissenters’ rights, shareholder oppression |
| Fair value (ASC 820) | Market participants, exit price | Market-participant synergies only | Considered at the unit of account | Financial reporting |
| Investment value | Specific buyer | Yes, buyer-specific | Not usually relevant | M&A analysis, negotiation |
| Intrinsic value | Analyst’s fundamental view | Varies | Varies | Investment analysis, some litigation |
Illustration: one company, several values
A manufacturing company with a defensible controlling, marketable value of $12 million on a fair market value basis might be:
- About $12 million in fair market value for a sale of 100% to a hypothetical buyer
- Less than its pro rata share for a 25% gift to a child, after supported discounts
- Its full pro rata share in a statutory fair value case brought by a 25% shareholder in many states
- Higher than $12 million in investment value to a strategic competitor with significant cost synergies
None of these is “wrong.” Each answers a different question.
Where disputes start: buy-sell agreements and divorce
Many disputes arise because a buy-sell agreement says simply “fair value” or “fair market value” without defining it, the level of value or whether discounts apply. A clear valuation clause, reviewed with a valuation professional, prevents years of litigation. See buy-sell agreement valuation clauses.
In divorce, states differ on the standard and on whether personal goodwill (tied to an individual) is a marital asset. See divorce business valuation. For disputes heading to court, our litigation support services include expert testimony.
For owners new to these ideas, DebtRemediationTools.org provides a plain-English introduction in business valuation basics and a practical overview of buying or selling a business.
Frequently asked questions
Fair market value assumes a hypothetical willing buyer and seller and allows discounts for minority and marketability where supported. Legal fair value is defined by state law for shareholder disputes and often excludes those discounts. Accounting fair value is a market-participant exit price under ASC 820.
Fair market value, as defined in the Treasury Regulations and interpreted through Revenue Ruling 59-60 and case law.
A strategic buyer may expect synergies that only it can achieve. The price it is willing to pay reflects investment value, which can exceed fair market value.
It depends on the buy-sell agreement, if one exists, or on state law if a court orders the buyout. Read your agreement carefully and seek advice early.
A single conclusion should use one standard. However, an engagement may present values under different standards for different purposes, such as negotiation and tax planning, as long as each is clearly labelled.
Next step
Not sure which standard of value applies to your situation? Contact Foxboro Consulting Group to scope a valuation that fits the purpose, and stands up to scrutiny.
This article is for general information and is not legal, tax or accounting advice. Standards of value are defined by the applicable law, regulation or agreement.
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