Standards of value are used to set a uniform price between the buyer and seller when purchasing goods or services. There are three primary standards of value: fair market value, fair value, and investment/strategic value.
FAIR MARKET VALUE
Fair Market Value is the most widely accepted standard of value and is used in many valuation scenarios. Fair Market Value is the price at which the 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.” In layman’s terms, Fair Market Value is defined as the selling price of property agreed upon by the buyer and seller, where the buyer and seller enter the agreement willingly. An important consideration of Fair Market Value is the “willing buyer and willing seller” mentioned are considered hypothetical as opposed to specific. Therefore, the individual motivations of the buyer or seller should not affect Fair Market Value. This is where Investment/Strategic Value differs from Fair Market Value.
Fair Value is typically used in litigation settings and can have several meanings, depending on the purpose and jurisdiction of the valuation. In most cases, Fair Value is the statutory standard of value applicable in cases of dissenting stockholders’ valuation rights.
Investment/Strategic Value is the value to a particular investor based on individual investment requirements and expectations. This is the typical standard of value in play with a sale of a business to an outside third party.
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