What is Fair Market Value,
and How Does the Owner Achieve It?

Owners know their companies in fine detail, the operations, customers, marketing, payroll, and people. Yet they often do not know one of the most important details of all: what the company is worth if they took it to market.

Fair market value is hard to pin down because, short of a completed transaction, it is largely theoretical. Buyers and sellers would behave predictably if conditions and outcomes were predictable, but M&A rarely follows a simple, predetermined path. Absent a closed deal, a theoretical valuation rests on a handful of inputs.

By the traditional definition, fair market value is the price at which a company would change hands between a willing buyer and a willing seller, both reasonably informed of the relevant facts, with neither under any compulsion to act. It generally represents a floor for a seller, since by definition it is a value a hypothetical willing buyer and seller would agree on.

Achieving it depends heavily on the process. Value can vary with the type of sale: a negotiated deal with a single buyer, or an auction or limited auction? Marketed to both strategic and financial buyers, or only one segment? Were some buyers excluded for competitive reasons? Were there conditions that narrowed the pool, such as the owner or management being unwilling to stay on? Each of these shapes a fair market value that is specific to the company, and the same company can carry very different values depending on the process and the conditions of the sale.

On the auction point: was the company marketed to a targeted group of buyers who understand it and its merits, or to every warm buyer willing to sign a confidentiality agreement? Knowledgeable buyers, aware of prevailing valuations, will place a market value within a range. A wide net can also pull in deep-value buyers happy to buy at a price that reduces their risk. Marketed competitively to the right-sized group of knowledgeable buyers, the process itself determines fair market value.

Ultimately, fair market value is about the process and the perceived competition for the company. Market it to an appropriate number of knowledgeable candidates and the market will tell the owner what the business is worth. If the owner disagrees with the market, they are under no obligation to sell, though a failed process carries its own unintended consequences. Private-company sales are not perfectly efficient, but the right process improves efficiency and gets to fair market value.

Many owners gauge worth by rules of thumb or broad industry metrics, which can be far too high or too low. Overestimating leads to disappointment and busted deals; underestimating can mean parting with the company for less than it is worth. A professional can help engineer a sale at a price that is both fair and aligned with the owner's broader objectives.