Part of the value process, the valuation professionals must ascertain the appropriate standard of value for the purpose of the valuation. There are several standards of value, such as fair market value, book value, investment value, intrinsic value. As stated, the purpose of the valuation determines the applicable standard of value, and the resulting value may vary widely depending upon which standard is applied.
Fair Market Value is the most commonly applied standard and is the only acceptable standard of value for all gift, estate, and income tax matters. It is also the standard of value identified and acknowledged in various state judicial precedents, and adopted by many family law courts, for marital dissolution purposes. Fair market value is defined as the following:
The price at which 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 the relevant facts.
Approximately 240 Sections of the Internal Revenue Code require Fair Market Value determination to assess tax liability and 15 million tax returns are filed each year on which taxpayers report an event involving a valuation related-issues.
Failure to focus on any elements of this definition could result in any incomplete or inaccurate business valuation.