Understanding Fair Market Value in Business Valuation

Understanding Fair Market Value

Fair market value (FMV) is a key concept in business valuation. It’s defined by several criteria:

• Highest Price Obtainable: The maximum value a business can realistically fetch.
• Open Market: Buyer and seller have a full understanding of relevant details.
• Prudent Parties: Each party acts in their best interest.
• Arm's Length: No special relationship or conflict of interest.
• Expressed in Money: FMV is stated in monetary terms.
• No Compulsion: Neither party is pressured or obligated to transact.

Many valuations assume “no compulsion to act” even where a seller was compelled to sell quickly (death, disease, divorce, debt). This can reduce reliability if not disclosed.

FMV in Canadian Law

• Income Tax Act (ITA): Section 248(1) — willing buyer/seller, informed parties, no compulsion.
• Excise Tax Act (ETA): Section 69 — price agreed by independent, knowledgeable parties.
• Special Taxes Act (STA): Emphasizes open markets and informed participants.
• CRA Guidance: IT-497R bulletin on determining FMV for tangible and intangible assets.
• CICA Handbook: Chapter 12 covers FMV in financial reporting, including intangibles.

Intangible Assets Under Canadian Law

Intangible assets—patents, brand value, IP—are a significant part of many businesses’ worth. Canadian law recognizes their value and includes specific regulations:

• ITA: Section 248(1) acknowledges intangibles as legal property.
• ETA: Recognizes intangibles in valuations.
• CRA: IT-497R guidance on valuing intangibles.
• Corporations Act: Section 2 defines intangibles as property.

Recent Developments and Their Impact

• Access to Credit: PPSA updates allow intangibles as collateral.
• Risk Management: Banks consider intangibles in loan assessments.
• Asset Protection: PPSA registration secures claims on intangibles.
• Streamlined Transactions: Standardized security processes for intangibles.

The Importance of Experience

• Comprehensive Analysis: Eric Jordan’s 25 factors span tangible and intangible drivers.
• Reducing Bias: Structured, transparent approach promotes consistency.
• Defensibility: Clear methodology supports communication with stakeholders.

Why Business Ownership Experience is Key

Experienced owners bring intuition about market dynamics, customer needs, and the intangible elements that drive value.

The Power of Combining Methodology with Real Experience

The Eric Jordan methodology provides a structured foundation. Paired with seasoned owner experience, it yields a comprehensive approach to valuation—especially where intangibles dominate.

Pricing

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