Understanding Fair Market Value in Business Valuation

What Is Fair Market Value?

Fair market value (FMV) is the central concept in business valuation in Canada. Whether you are planning a sale, resolving a dispute, reorganizing a corporation, or working through a divorce, the discussion eventually comes back to FMV.

Under Canadian practice, FMV is generally understood to mean the price that:

• Highest Price Obtainable: Reflects the most a business would reasonably sell for in an open market.
• Open Market: Is reached where potential buyers and sellers are reasonably informed about the relevant facts.
• Prudent Parties: Assumes both parties act in their own best interests, using normal care and judgment.
• Arm's Length: Involves parties who are independent of each other, with no special relationship or pressure.
• Expressed in Money: Is stated as a cash (or cash-equivalent) price.
• No Compulsion: Assumes neither party is forced to buy or sell.

In many real-world situations, sellers are under pressure (death, disease, divorce, debt). Clear valuation work acknowledges these realities so that users of the report understand where outcomes are “pure FMV” and where circumstances may have reduced actual sale price.

FMV in the Canadian Legal Context

Canadian statutes and guidance use FMV in many contexts, from tax to financial reporting. While wording can differ slightly, the underlying idea is consistent: a notional price between informed, prudent, arm’s length parties with no compulsion to act.

• Income Tax concepts: FMV is used in assessing tax consequences for transfers, rollovers, estate freezes and related-party transactions.
• Sales and excise tax concepts: Similar FMV notions apply when determining value for tax on certain supplies and transactions.
• CRA administrative guidance: CRA publishes interpretation bulletins and other guidance on how FMV is interpreted in practice, including for intangible assets.
• Financial reporting: Accounting standards recognize fair value and FMV concepts when measuring certain assets and liabilities.

A business valuation that is aware of these legal expectations—and clearly explains assumptions and methods—tends to be more resilient in audits, negotiations, and courtrooms.

Intangible Assets and FMV

For many modern businesses, most of the value is intangible. These assets may not be fully reflected on the balance sheet, yet they strongly influence earnings and risk.

Examples include:

• Reputation and brand strength
• Customer relationships and recurring revenue
• Patents, software, proprietary data and know-how
• Management depth, systems, and culture

Canadian legal and tax frameworks acknowledge intangibles as property interests that can be bought, sold, pledged, or transferred. A practical valuation must therefore:

• Identify and describe key intangible assets.
• Connect those assets to earnings, risk, and sustainability.
• Support the conclusion with evidence and clear reasoning.

This is where structured tools like the 25 Factors Affecting Business Valuation and the 5 Senses Inspection Report help turn “soft” value into documented, defensible analysis.

Recent Developments and Their Impact

Legal and financial practice has been catching up to the reality that intangible assets dominate enterprise value. A few trends that affect business owners:

• Access to credit: Personal Property Security legislation in Canadian provinces allows certain intangibles to be used as collateral, subject to proper registration.
• Risk assessment: Lenders and investors increasingly look beyond brick-and-mortar assets to understand contracts, recurring revenue, and management systems.
• Asset protection: Clear documentation and registration of rights in IP, brands, and other intangibles can strengthen security and negotiating position.
• Transaction efficiency: Standardized approaches to describing and securing intangible assets make complex deals easier to structure.

In short: as the law and markets recognize intangibles more explicitly, the quality of your valuation—and its supporting documentation—matters even more.

Experience + Methodology = Defensible FMV

Two things underpin a reliable business valuation:

• Structured methodology: The 25 Factors framework forces the valuator to consider purpose, earnings, risk, systems, people, competition, and opportunity—rather than relying on a single formula or rule of thumb.
• Real-world ownership experience: Someone who has actually owned and operated businesses is more likely to notice the “tone” of the numbers—what is sustainable, what is fragile, and what truly drives value.

When those elements are combined, the result is a valuation that:

• Is grounded in Canadian FMV concepts.
• Reflects both tangible and intangible value drivers.
• Can be explained in plain language to courts, CRA, lenders, and counterparties.

Why Business Ownership Experience Matters

Valuation is not just about spreadsheets; it is about judgment.

An experienced owner-operator understands:

• How customers, staff, and suppliers actually behave in stress scenarios.
• What makes earnings “sticky” versus transient.
• How small operational changes can materially impact future value.

That practical insight, combined with law-aligned methodology, helps separate theoretical value from what a prudent buyer would really pay.

The Power of Combining Methodology with Real Experience

The Eric Jordan methodology provides the framework. Hands-on experience provides the context. Together, they produce a valuation that can stand up to:

• Negotiations between buyers and sellers
• Shareholder and partnership disputes
• Divorce litigation and family law matters
• CRA review for reorganizations, rollovers, and estate freezes

The goal is simple: a number you can rely on when the stakes are high.

Pricing

Professional business valuation in Canada, typically between $1,500 and $15,000. Average fee around $3,500.