Fair Market Value (FMV)

Fair market value (FMV) is one method for valuing an asset or business. FMV is supposed to equate to a price that a third party would pay in the open market for the asset or business. In the context of operating companies, a fair market value calculation would be used if a company were to be bought or sold or if an equity shareholder in the company were to be bought out by one of the other shareholders or by a third party, assuming no other method of calculating the purchase price is otherwise agreed upon by the parties. Often in the case of purchases and sales of companies, or the buy-out of a partner in a business, FMV is merely one method used for the calculation. Business appraisers often are requested by parties to come up with a fair market valuation of a company in connection with the purchase and sale of a business. Other methods to value a business, including the equity held by the shareholders in the business, is book value, which is more or less a straightforward assessment of the assets minus the liabilities. As another example, some operating agreements set forth mathematical formulas such as capitalized earnings to calculate the value of equity in the company, particularly for cases in which one interest holder would need to buy out another interest holder.