Fair Market Value And Fair Market Value In The Business

Fair market value is a standard typically used for real estate valuation, certain tax issues, and employee stock ownership plans. Fair value in a legal context is a standard typically used for business interest valuation for estate tax and business litigation. Fair value in a financial reporting context is appropriate for the preparation of financial statements. The terms fair market value and fair value are typically used in business-owner buy-sell agreements without proper consideration of the confusion these terms can cause.

Fair market value is defined by the Internal Revenue Service as the price at which a property would change hands between a willing buyer and a 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. It is implicit in the definition of fair market value that the sale is consummated as of a specific date and the title pass from seller to buyer under the following …show more content…
One very practical test for the value standard and procedure for setting the price of a buy-sell valuation is to ask if the business is capable of generating the funds to enable payment of the price. In judging capability, not just the price but also the terms become the critical issue in determining whether the buy-sell strategy can be supported. For example, the death trigger will often cause an immediate payment to become due, whereas a disability trigger may cause a series of payments over time to complete the purchase. With these considerations in mind, the buy-sell agreement must specify in detail the standard of value and the application of the standard of value. Use of the terms fair market value and fair value will not sufficiently define the value or the process used to specify the price for the