Fair Market Value (FMV)
The most probable price at which a business would change hands between a willing, informed buyer and seller, each acting without constraint.
Definition
Fair market value (FMV) is the most probable price at which a business would be sold in an open market, between a buyer and a seller acting freely, without pressure, and with reasonable knowledge of the relevant facts.
In French-language Quebec documentation, you’ll see juste valeur marchande (JVM) used for the same concept.
Why FMV matters in a business sale
FMV serves as a reference point in several contexts:
- Tax: the Canada Revenue Agency (CRA) relies on FMV for several analyses tied to capital gains, share transfers, and reorganizations
- Negotiation: it provides an objective basis for discussions between buyer and seller
- Estate planning: it’s often required for an estate freeze, a share transfer, or a corporate reorganization
What FMV isn’t
FMV isn’t necessarily:
- the price posted by the seller
- the price the owner hopes for
- the price a highly motivated strategic buyer might agree to pay
A strategic buyer may pay above FMV if they see clear synergies: eliminating a competitor, gaining access to a territory, quickly integrating a team, or immediate commercial leverage. On the other hand, a rushed or poorly prepared transaction can close below FMV.
What makes FMV move
FMV never rests on a single impression. It’s built from recognized methods and defensible assumptions, notably:
- normalized profitability
- multiples observed in the market
- the quality of the assets
- the perceived risk level
- the depth of the buyer pool
In practice, we more often talk about an FMV range than a single number down to the dollar.
What every seller should know
- FMV isn’t a fixed number — it’s a range estimated using recognized methods
- The actual sale price can differ from FMV depending on the negotiation, the synergy with the buyer, and market conditions
- For significant tax or transactional purposes, it’s prudent to have FMV established by a business valuation expert (CBV)
- Good sale preparation doesn’t change the definition of FMV, but it can favourably influence the range the market is willing to recognize