Business Valuation Series - Introduction to FMV (Part 1)
Written by: Chandler Hiller, CPA, ABV and Megan Ramey, CPA, CFF, ABV
Welcome to our Business Valuation blog series! Over the course of this series, we will explore key business valuation concepts such as the definition and meaning behind “fair market value,” the difference between when a simple calculation of value suffices versus when a full valuation is necessary, and the three generally accepted approaches to valuing a business. Our goal is to help you gain a clearer understanding of what goes into valuing a business and to demonstrate how we at Cogence Group can support you throughout the process. Enjoy the series!
What Is Fair Market Value, Really?
And Why It’s Often Different Than What You Think Your Business Is Worth
“Fair market value” (FMV) is one of the most widely used and widely misunderstood concepts in business valuation.
Whether you’re involved in a buy-sell agreement, planning an estate, preparing for litigation, or contemplating a sale, chances are you’ve heard this term. But what does it really mean? And why does it often differ from your personal sense of what the business is worth?
Let’s break it down.
The Technical Definition
The IRS defines fair market value as:
“The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”
Further, the International Glossary of Business Valuation Terms defines fair market value as:
“The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”
Those definitions sounds simple, but carry a few critical assumptions:
Hypothetical parties — not you, not your business partner, not your competitor
Willing, informed buyer and seller — no one’s desperate or uninformed
Arms-length transaction — no related parties or special deals
Cash or cash-equivalent price — not an equity swap or interest free seller financing
For example, a buyer may agree to pay a higher price when a seller offers below-market financing or when unique operational synergies are expected, or the buyer may offer a portion of its own shares that are not marketable to do the deal. A cash-equivalent valuation removes these deal-specific premiums.
What FMV Is Not
It’s important to understand what fair market value isn’t:
It’s not what you think your business is worth based on sweat equity
It’s not the price a strategic buyer might pay to gain market share
It’s not the number from your last funding round or your last business valuation
It’s not based on emotional value or future potential only you see
Where It Matters Most
Fair market value comes into play in a wide range of situations:
Estate & gift tax valuations
Divorce and shareholder disputes
Buy-sell agreements
Financing and SBA loans
Impairment testing and financial reporting
ESOPs
In these scenarios, FMV isn’t optional, it’s the standard used by courts, the IRS, and auditors.
Why FMV Often Feels “Too Low” to Owners
Business owners often expect their valuation to reflect years of hard work, personal sacrifice, or the “potential” they see in the company. And to them, FMV can feel underwhelming.
At Cogence Group, we see this disconnect all the time. We worked on numerous valuations in 2025 in which the owner’s estimate was twice the actual FMV. The difference wasn’t because we undervalued the business but it’s because FMV is based on a market-based, risk-adjusted lens. Not your passion, your plans, or your potential.
FMV vs. Other Types of Value
Types of value and their definitions
Fair Market Value — Price between hypothetical, willing buyer and seller
Investment Value — Value to a specific buyer based on synergies or strategic goals
Book Value — Accounting value of net assets (total assets less total liabilities) on the balance sheet using historical cost accounting
Liquidation Value — What assets would fetch in a forced or orderly sale
Intrinsic Value — Theoretical value based on fundamental analysis
If you’re selling to a competitor who wants to acquire your customer list, they might pay well above FMV. But in litigation, estate planning, or gifting, FMV is the standard.
So... What’s Your Business Worth?
Fair market value may not reflect your emotional investment but it’s a vital, defendable benchmark when you need an objective measure of value.
At Cogence Group, we apply generally accepted valuation approaches and methodologies, plus professional judgment to arrive at credible, supportable FMV conclusions. We’ve worked across industries and divergent types of companies, from small professional practices to multi-million-dollar operating companies, and we’re always happy to talk through what FMV would mean in your specific case.
Let’s Talk
If you’re unsure what your business is worth, or whether fair market value applies to your situation, reach out. We’ll walk you through the process, help you understand your options, and provide the level of support that fits your needs.
Stay tuned for our next blog post in the series: Calculation of Value or Full Valuation?