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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: Both the buyer and seller should have a full understanding of the relevant details about the business.
• Prudent Parties: Each party acts in their best interest.
• Arm's Length: Buyer and seller shouldn’t have any personal relationship or conflict of interest.
• Expressed in Terms of Money: FMV is always given in monetary terms.
• No Compulsion: Neither party should feel pressured or obligated to complete the sale.

One of the biggest issues with many valuations is the assumption of “no compulsion to act.” Often, market valuations overlook cases where a seller may have been compelled to sell quickly (due to things like death, disease, divorce, or debt). This lack of transparency can make a valuation less reliable.

FMV in Canadian Law

Canada’s legal framework firmly supports fair market value standards. Here are some key references:

• Income Tax Act (ITA): Section 248(1) defines FMV as “the amount that a willing buyer would pay and a willing seller would accept, with no compulsion to act and both having a clear understanding of relevant facts.”
• Excise Tax Act (ETA): Section 69 aligns with this, stating that FMV is the price agreed upon by independent, knowledgeable parties.
• Special Taxes Act (STA): Supports FMV by emphasizing an “open market” and informed participants.
• Canada Revenue Agency (CRA): IT-497R bulletin provides further guidance on FMV for both tangible and intangible assets.
• CICA Handbook: Chapter 12 offers a comprehensive view of FMV for financial reporting.

Intangible Assets Under Canadian Law

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

• Income Tax Act (ITA): Section 248(1) acknowledges intangible assets as legal property.
• Excise Tax Act (ETA): Echoes the ITA, recognizing intangible assets in valuations.
• CRA Guidance: IT-497R bulletin includes guidance on intangible valuation.
• Corporations Act: Section 2 defines intangible assets as “property,” making them part of FMV.

Recent Developments and Their Impact

Legal updates to the Personal Property Security Act (PPSA) in BC and Ontario enhance the recognition of intangible assets:

• Increased Access to Credit: Intangible assets can now be used as collateral.
• Improved Risk Management: Banks can include intangible assets in assessments.
• Enhanced Asset Protection: PPSA registration gives lenders security rights over intangibles.
• Streamlined Transactions: PPSA simplifies financing processes for intangible assets.

The Rise of Intangible Assets Over Four Decades

Intangible assets have grown substantially in importance, now representing up to 90% of the value of public companies:

• 1975: About 17% of market value was intangible.
• 2001: Intangibles represented 70%.
• 2020: Ocean Tomo report found 90% of S&P 500 value was intangible.

These shifts reflect a knowledge-driven economy where brand, innovation, and customer loyalty define value.

The Importance of Experience

The Eric Jordan “25 Factors Affecting Business Valuation” methodology is grounded in real-world business ownership. Here's why it stands out:

• Comprehensive Analysis: Covers tangible and intangible aspects of a business.
• Reducing Bias: A transparent framework promotes valuation accuracy.
• Defensibility: Easily communicated and backed by structured logic.

Why Business Ownership Experience is Key

Real entrepreneurs understand how value is created. Their lived experience enables them to:

• Sense Market Trends: React faster and more accurately to shifts.
• Measure Intangibles: Spot value in things that spreadsheets can't show.

The Power of Combining Methodology with Real Experience

Eric Jordan’s framework gives structure. Business experience gives context. Together, they result in business valuations that reflect reality—not theory.