When it comes to business valuations, there are a number of different concepts and terms that it's important to understand. Three of the most commonly used terms are Fair Market Value, Fair Value, and Strategic Value. While these concepts are related, they have distinct differences that are important to understand if you're considering selling your business or making any other important financial decisions.
Fair Market Value (FMV)
Fair Market Value is defined as the price that a buyer and seller would agree upon in a transaction, given a reasonable amount of time, with both parties acting in their own self-interest, and with no pressure to either buy or sell. In other words, FMV is the price that a business would likely fetch in a hypothetical transaction between a willing buyer and a willing seller, with no duress on either side. FMV is widely used as a benchmark for valuing a business, particularly for estate, gift, and income tax purposes.
Fair Value (FV)
Fair Value is a broader term that can encompass a range of concepts, including FMV. Fair Value is often used in accounting and financial reporting, and refers to the price that a company would receive if it were to sell its assets, or dispose of its liabilities, in a transaction that takes place at the date of the valuation. This term is generally used in the context of financial reporting and refers to the price that would be received if a company were to sell its assets or liabilities on the open market before any discount for lack of marketability or discount for lack of control. This value is commonly used for divorce and marital dissolution.
Strategic Value (Investment Value)
Strategic Value refers to the value that a business would have to a specific buyer in a specific transaction. This value is driven by the buyer's specific objectives and strategic goals, and takes into account factors such as synergies, economies of scale, and access to new markets. Strategic value is often higher than FMV, as it is based on a specific set of circumstances, and is therefore highly specific to the buyer and the transaction.
Conclusion
It's important to understand the differences between Fair Market Value, Fair Value, and Strategic Value, as these concepts are used in different contexts and can have different implications for the value of your business. When you're considering selling your business or making other important financial decisions, it's important to work with a qualified business appraiser who can help you understand these concepts and determine the most appropriate value for your business.
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