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Before the value of a business can be measured, the appraiser must understand the purpose and circumstances surrounding the business valuation. This guides the appraiser in selecting an appropriate standard of value. The standard of value establishes a set of hypothetical conditions under which the business will be valued. The most commonly used standard of value is: Fair Market Value, (FMV).

Under Treasury Regulation §20.2031-1 FMV is defined as: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” FMV differs from other standards of value such as: fair value, intrinsic value, strategic value, or investment value, each having its own set of conditions by which an appraiser is guided.

Opinions of value are always based on subjective interpretation of available information at the time of assessment. The applied hypothetical assumptions might not, and probably do not, reflect the actual conditions of the market in which the subject business might be sold. However, these conditions are assumed because they yield a uniform standard of value, after applying generally accepted valuation techniques. Under these circumstances it is exceedingly important to select an experienced, credentialed appraiser who understands the nuances involved in applying such techniques and can make appropriate decisions to determine a reasonable estimate of value.