Standard of value is a shorthand for describing who is the buyer and who is the seller and what is the framework for the transaction in a business valuation.

For instance a race car has a very different value to a race car driver than it would to a family of six looking for a safe car.  The value is also likely to be different if the seller must sell in a week or has three months to make a deal.

While this distinction can be subtle, it can shift the found value significantly.   For instance a Fair market value and fair value valuations regularly have a 15-30% or more value variance.  A brief explanation of the primary (but not all inclusive) standards of value follow.

Fair Market Value 

“The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” Rev. Ruling 59-60.

Other important points that, while not in the above definition, are agreed upon by the valuation community:

  • This payment is in cash or immediately available funds (which means it will be cash within three days).  Basically this is a typical buyer and a typical seller transaction at an all cash price.
  • The buyer and seller are hypothetical not the actual parties.
  • Finally fair market value is often not the highest price that might be obtained.  It is a likely price by a financial buyer with no synergies unless many buyers have the synergies.

The fair market value standard, when used to value minority and lack of control interests, will require discounting or other adjustments.  The owner’s of these lack of control interests do not have the ability to control the company, (the difference between being the driver of the car and in the passenger seat) hence their shares are difficult to sell and garner much lower prices than control owners.   Discounting is, in effect, a second valuation that reduces the value found from company value to the specific minority owner’s interest value.

Fair Value

Definitions vary, but for litigation and state law purposes, it is usually the fair market value of 100% the equity interests in the enterprise that are then divided pro-rata based on ownership percentage.  There are no discounts for minority interest or discounts for lack of marketability for lack of control shareholders.  Again, these are the discounts that arise from being “along for the ride” instead of in control of the company.  State statutes and in litigation by courts of equity frequently use Fair Value to protect minority shareholders.  (Please Note: Fair Value in GAAP public accounting has a different definition but that is rarely applicable to small and very small businesses and will not be addressed here.)

Synergistic Value

Synergistic Value is the value to a buyer where the buyer can make more money from the acquired company than the acquired company could on its own.  Consider two delivery companies with half empty trucks going on the same routes.  Surely if one acquired the other the successor would be more efficient and profitable.   This is Synergistic Value.

If there are many synergistic buyers, then synergistic value may actually equal fair market value.  If synergistic buyers are rare, then fair market value will be below synergistic value.

Investment Value

Investment Value is a market value where the buyer and seller are known. This valuation would attempt to use actual revenues and expenses to determine cash flows from the two companies.   Investment value may be synergistic or not.

Remember fair market value is NOT the actual buyer and seller but a representative hypothetical typical buyer and seller.

Liquidation Value

Liquidation Value is the value of the assets that must be sold in a defined time frame.  Orderly liquidation assumes about a 90 day sales window.  Assets must be sold promptly but there is some time to make a market.  Forced liquidation is also known as auction value, the price when the asset will be sold on a set date.

Clearly the standard of value selected will greatly impact the value found in a business valuation.



  • Do you need a valuation for your business or for your clients?
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Download the e-book “7 Things to Know About Business Valuation“  http://harvestbusiness.com/7-things-to-know-about-business-valuations/ – and then connect with Greg if you have any questions about a business valuation for you or your clients

Greg is a Partner at Harvest Business Advisors where he has valued and brokered hundreds of small and mid-sized businesses.   As Editor-In-Chief of “Around the Valuation World,” a monthly webinar for the National Association of Certified Valuators and Analysts (NACVA), he is in the forefront of current business valuation practices.