Fair market value prices a hypothetical sale and usually applies minority discounts; fair value is a statutory shareholder standard that often excludes them.
The price at which the interest would change hands between a willing buyer and a willing seller, neither under compulsion and both with reasonable knowledge of the relevant facts. It is the standard in tax matters, in many divorce and buy-sell contexts, and it ordinarily considers discounts for lack of control and lack of marketability.
A standard defined by statute or case law for a specific purpose, most often dissenting and oppressed shareholder matters, that frequently excludes some or all of the discounts fair market value would apply. Its meaning depends on the jurisdiction and the context, and it is not the same as the financial reporting definition of the term.
| Dimension | Fair Market Value | Fair Value |
|---|---|---|
| Where defined | Tax authority definitions and professional valuation standards | State statutes and case law; separately, financial reporting standards |
| Hypothetical parties | A willing buyer and a willing seller | Often the actual parties and the actual transaction |
| Discounts | Lack of control and lack of marketability usually considered | Often excluded, depending on the jurisdiction |
| Typical use | Tax, divorce in many states, buy-sell agreements | Dissenting and oppressed shareholder matters |
| Effect on a minority interest | Usually lower | Usually higher |
Fair market value applies where the governing framework, the agreement, or the tax context calls for it: estate and gift matters, most buy-sell agreements that name it, and divorce in the states that adopt it. The valuation considers what a hypothetical buyer would pay for the interest as it exists, including the disadvantages of holding a minority stake in a closely held company.
Fair value applies where a statute or a court defines it for the matter at hand, most commonly when a shareholder dissents from a merger or claims oppression and the company or the majority must buy the shares. Many jurisdictions read the standard to exclude discounts for lack of control and marketability so the departing owner receives a proportionate share of the whole.
The two standards share the same approaches to value and often the same enterprise-level conclusion; they diverge in how the interest is treated after the enterprise is valued. The choice of standard is a legal question, and the valuator applies the one counsel identifies, states it in the report, and where the standard is unsettled presents the result under each. Applying the wrong standard is one of the most common reasons a valuation is rejected, so the business valuation in litigation guide treats the standard of value as the first decision of the engagement.
No. Financial reporting standards define fair value for measuring assets and liabilities on financial statements. The litigation standard is defined by the state's statute and case law for shareholder matters, and the two definitions can differ in important ways.
A discount for lack of control or lack of marketability can reduce the value of a minority interest substantially below its proportionate share of the enterprise. Whether the standard allows the discount can therefore change the number more than any other single decision in the valuation.
It varies by state. Some states use fair market value, some apply a fair value concept that limits discounts, and some have developed their own approach through case law. Counsel identifies the standard and the valuator applies it.
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