Fair Value or Fair Market Value: Why it Matters
When the business of a business enterprise is on the table, the valuation standard isn’t background—it is the case. Courts, arbitrators, and mediators decide remedies based on numbers tied to a defensible legal standard, reliable methods, and a record the tribunal trusts.
This page explains the standards of value, how discounts and adjustments really work, and how to build the evidentiary spine that carries your expert’s opinion across the finish line.
Fair Value vs. Fair Market Value
Fair Value (in many shareholder/LLC statutes) aims to capture the owner’s proportionate interest in the enterprise without minority or marketability discounts—but application varies by jurisdiction and case law.
The Fair Value of a business is driven by the concept of the current and future economic value to the owners. For the closely held business, that means cash flow after expenses, something that for a number of reasons does not translate well into market price.
Fair Value is generally not what a buyer would will likely be willing to pay now. The concept is nuanced, however, and very much depends on the particulars of the business and the equity interest that is being considered.
The policy rationale for requiring Fair Value in business governance disputes is to prevent majority oppression by refusing to devalue a minority owner simply because they lack control. When fair value is the governing standard, the question becomes what the whole enterprise is worth and then what the proportionate slice equals—in most cases with no discounts for the lack of marketability of the minority interest (DLO) or the lack of control over the entity (DLOC)
Fair Market Value (FMV), by contrast, assumes a hypothetical willing buyer and seller with no compulsion to act, both having reasonable knowledge of the relevant facts.
Under FMV, the market’s realities rule. An interest that is at best difficult to sell and that lacks control over the decisions of the business is worth less. Applicability of a DLOC and DLOM is expect. The corollary is true for controlling interests. They are easierto sell and more valuable, and therefore subject to premiums.
On top of the control and marketability premiums, synergies and the identity of the purchaser often come into play. If the market for the business is favorable, that is reflected in the market value.
Practical effect: Identify the standard of value early. Your choice controls discovery targets, negotiations, expert method set, discount posture, demonstratives, and—even more importantly—settlement ranges. If you brief the standard late, you negotiate in the wrong currency.
Discounts, Control, and Adjustments
DLOC & DLOM. Under statutory Fair Value, courts frequently reject minority and marketability discounts to avoid rewarding oppressive behavior. Under FMV, the debate shifts to how much discount and why—is there empirical support or a case‑specific reason to narrow or widen it? Either way, brief the issue, don’t just footnote it.
Control premiums & synergies. Should a premium be baked in? If the buyer pool is financial rather than strategic, many tribunals push back on synergy‑rich models. Where the legal standard or facts permit, be explicit about which synergies are enterprise‑available vs. buyer‑specific, and justify any control premium with concrete governance and cash‑flow levers.
Normalizing adjustments.
- Owner compensation: Align comp with market reality; document the support (surveys, comps, historicals).
- Related‑party transactions: Reprice or remove distortive intercompany deals; show your math.
- Non‑recurring items: One‑time litigation, unusual gains/losses, COVID‑era anomalies—normalize with transparency.
Bottom line: Discounts and adjustments can swing millions. Put them in the opening roadmap, brief them with authorities, and force your opponent to pick a lane.
Framing the Theory with Your Expert
Engagement letters that preserve independence. Define scope, note the governing standard, and set a clean‑room process for drafts and assumptions. Include protocols for reliance materials, confidentiality, and demonstratives. Keep counsel’s edits to memo‑based feedback, not redlines, to avoid “ghost‑writing” optics.
Draft discipline. Separate legal theory (what the standard allows) from economic conclusions (what the data supports). Maintain a workpaper index and a reliance list. If an assumption is legal (e.g., “no DLOM under Fair Value”), label it as such so the expert’s methodology remains independent.
In Litigation, Will the Report Be Admitted.
- Methodology: Accepted approaches (income, market, asset) fit the standard and the facts.
- Data quality: Complete, verifiable inputs with documented adjustments.
- Sensitivity testing: Show the effect of key variable like weighted average cost of capital, growth, or terminal value changes; present reasoned ranges.
- Transparency: Workpapers, schedules, and reliance materials are organized and reproducible.
Deliverable to the court: A valuation that reads like a decision‑ready narrative: It encompasses, in order: standard, method(s), inputs, adjustments and normalizations and transparent calculations, all leading to conclusion, with sensitivity exhibits that should explain, not obscure.
Evidence that Moves the Needle
Books‑and‑records and targeted financials. Begin with cap table, minutes, shareholder/operating agreements, audited/compiled financials, tax returns, bank covenants, and KPI dashboards. If stonewalled, a books‑and‑records action is often the fastest pressure valve.
Customer and supplier concentration. Show revenue durability (or fragility) by mapping top‑10 customers, churn, concentration risk, backlog, and pipeline quality. If a few relationships drive EBITDA, the model should acknowledge that risk.
Management credibility & diversion proof. Track compensation, related‑party deals, reimbursed expenses, and any evidence of diversion or freeze‑outs. Credibility findings often decide whether the tribunal trusts your model’s inputs.
Interim performance under TROs/receiverships. Temporary orders can stabilize operations and preserve value. Data from the interim period—cash reconciliation, AP/AR behavior, customer retention—can validate (or correct) assumptions in real time.
Remedy & Deal Architecture
At the end of the road is remedy and/or a deal—and the remedy or deal has its own architecture.
Buy‑outs. Cash at close is clean but not always feasible. Consider installment notes with security, springing covenants, financial reporting, and valuation refresh triggers. Don’t forget governance cleanup—board reconstitution, releases, and IP/data transitions.
Sale or receiver scenarios. Neutral control can calm operations and data flow. A receiver or custodian can set a sale process that maximizes value and protects records. Weigh optics and cost against benefits; tailor authority to the operating reality.
Earn‑out & escrow mechanics. When models disagree, an earn‑out can bridge the gap if metrics are audit‑ready and dispute processes are specified. Use objective definitions (GAAP with stated exceptions), escrow with clear release milestones, and dispute boards or expedited arbitration for metric fights.
Throughline: Tie the valuation theory to the transaction terms. Remember trials are rare and even in litigation the overwhelming probability is that the resolution is a negotiated transaction. The best number fails if the deal can’t close or the decree can’t be enforced.
FAQs
Which standard applies in my case—Fair Value or FMV?
It depends on statute, entity domicile, contract language, and forum. We analyze the standard at intake and tailor discovery and expert design so your model fits the law—not the other way around.
Will the court apply minority or marketability discounts?
Often not under Fair Value in shareholder statutes, but jurisdictions differ and facts matter. We brief discount treatment early and, where FMV governs, present empirical support and case‑specific rationales for any adjustment.
What if only one side has books and data?
We use targeted discovery, books‑and‑records actions, protective orders, and forensic protocols. If necessary, we seek adverse‑inference remedies. The aim is a complete, reliable dataset to support the model.
Can different methods reach the same conclusion?
They should triangulate. Income, market, and asset approaches can point to similar ranges when assumptions are consistent and justified. We explain differences with sensitivity exhibits rather than forcing a false precision.
Do the other remedies—appointment of a custodian, special fiscal agent or receiver help or hurt value?
Done right, any of these remedies can stabilize the business, preserve records, and improve credibility. Done poorly, they may have a devastating impact on value. We assess cost, authority scope, lender reactions, and sale risk before recommending the tool.
Key Takeaways
- Choose the valuation standard first, build discovery second. The standard decides which inputs matter and how the tribunal will read them.
- Discounts can swing millions—brief them, don’t just mention them. Put DLOM/DLOC, control, and synergies in your opening theory and your expert’s design.
- Expert independence and record engineering win admissibility battles. Clean process, reliable data, and transparent methods make opinions stick.