Valuers commonly use the term “fair market value”.  Often this is abbreviated to “market value”.  These terms are generally synonymous and are generally defined in similar terms to those adopted in the international glossary which defines the term “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, where neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

It is common valuation practice when applying a fair market value standard to not take into account the possible existence of a special purchaser to whom the relevant asset might have additional value because of, for example, economies of scale, reduction in competition, or strategic or other perceived advantages.  This is because whether or not such a buyer (if one exists) would be prepared to, or would need to pay a significantly higher price would generally depend upon the number of such special purchases and their unique circumstances at the time of the transaction.

A second and often used standard is that of “fair value”.  Fair value is essentially an undefined term and is more relevant when valuing minority parcels of shares.  A common way of describing fair value is:

“The concept of fair value is based on a desire to be fair and equitable to parties involved in the transaction. It usually applies in a situation where the parties are not free to go into the market and strike the best price for the purchase or sale.  A valuation under such circumstances would take account of both what the vendor is giving up and what the purchaser is acquiring value.  It is the value itself that in particular must be seen to be fair and also to be equitable between the identified parties to the transaction.”

Fair value recognises that a transaction is not in the open market.  Buyer and seller have been brought together by the operation of a legally binding agreement in a way which excludes other potential buyers and sellers.  Lastly the buyer has not been able to shop around for the lowest price nor has the seller been able to hold out for the highest price.  In these circumstances, fair value must take into account, as a minimum requirement, what the seller gives up in value and what the buyer acquires in value through the transaction.