Fair market value is a defined estimate of value under specified assumptions about a hypothetical exchange between willing parties.
Definition
Fair market value is a standard used in some valuation settings, with the applicable definition determined by the governing law, regulation, contract, or professional context. It generally frames a hypothetical exchange between willing parties under specified assumptions, but the details matter. Owners may see different estimates because appraisers use different valuation dates, information, methods, assumptions, and definitions of the interest being valued. A fair market value estimate may not equal the price a particular buyer offers or the proceeds an owner receives in a negotiated transaction. It is not the same as investment value to a specific buyer, book value, or a guaranteed sale price. Before using a valuation, owners identify the purpose, standard, and assumptions stated in the report or agreement. For related context, see the guide to valuing a civil engineering firm and AICPA valuation resources.
How owners use it
- Owners identify the valuation standard and purpose before comparing estimates or discussing a transaction.
- A valuation reviewer notes the valuation date, ownership interest, and assumptions used in the estimate.
- If a report estimates fair market value at $2 million and a buyer offers $1.8 million, the difference is $2 million - $1.8 million = $200,000.
- Owners use the definition stated in an applicable plan, agreement, or valuation engagement when interpreting a figure.
