The investor’s field guide · F
Fair market value
The price a willing buyer would pay and a willing seller would accept, with neither under pressure and both reasonably informed.
Explained by the editorial team
Fair market value describes a hypothetical, not a fact you can look up. It asks what a transaction would actually settle at between a willing buyer and a willing seller, neither forced into the deal, both with reasonable knowledge of the business. An asking price, an insurance value and what a particular buyer can personally afford are all different things.
The concept is applied differently by jurisdiction. In the UK, HMRC uses a statutory version for tax purposes: "the market value of an asset is the price which that asset might reasonably be expected to fetch on a sale in the open market" (HMRC Capital Gains Manual, CG14530). In the US, the IRS's own valuation guidelines build on the same willing buyer, willing seller idea for closely held businesses (IRS Business Valuation Guidelines).
A worked example
A seller lists a business at £500,000. An independent valuer, applying the earnings approach, concludes a fair market value nearer £380,000 once discretionary earnings and a reasonable multiple are tested. The asking price and the fair market value can differ; a negotiation is partly an argument about which one is closer to reality.
What to examine
Ask which approach produced the figure, what profit measure it used, and whether the valuer had a stake in the outcome. A value prepared for the seller, or by the buyer themselves, is not independent. Tax and lending rules built on this concept change; check current official guidance rather than treating any figure as fixed.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.