Key Insight
Fair market value is a theoretical construct — every real transaction has a motivated seller, a specific buyer with unique synergies, and terms that reflect leverage rather than pure economics. FMV is a starting point, not a ceiling.
The FMV Standard
FMV is the legal and appraisal standard for business valuations used in tax reporting, estate planning, and SBA financing requirements. The IRS defines it in Revenue Ruling 59-60 with eight factors:
- Nature and history of the business
- Economic outlook generally and for the specific industry
- Book value and financial condition
- Earning capacity
- Dividend-paying capacity
- Goodwill and intangible value
- Prior sales of the business's stock
- Market prices of comparable companies
FMV vs. Strategic Value
Strategic value — what a specific buyer with unique synergies might pay — often exceeds FMV. A competitor acquiring your biggest rival can pay more because the combined entity creates economic value beyond what either business generates independently. SMB buyers who are operator-investors (not strategic acquirers) typically pay at or near FMV.
Where FMV Matters in Acquisitions
SBA valuations: SBA lenders require a third-party FMV opinion on larger acquisitions (goodwill above $250K-$500K depending on lender). The lender won't lend above the appraised FMV.
Tax filings: Post-close, the buyer and seller must agree on purchase price allocation (Form 8594). The IRS may challenge allocations that diverge significantly from FMV — particularly when goodwill is understated to reduce seller's capital gains.
Estate and divorce: When business interests must be valued for legal purposes, FMV is the standard used.
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