“What is my company worth?” sounds like a question with one right answer. It isn’t. The same business can carry very different values depending on why you are asking, who will rely on the answer, and which definition of value the analyst is told to use.
That definition is called the standard of value. It is one of the first things set in any valuation engagement, and it shapes everything that follows: the assumptions, the adjustments, the discounts and, ultimately, the number on the last page. Owners who understand it before they hire anyone get a more useful result, and usually spend less getting it.
Two different questions: a formal valuation vs. what a buyer might pay
A formal valuation answers a technical question for an outside audience. An estimate of transaction value answers a practical question for the owner. Both are legitimate, but they are not interchangeable.
A formal valuation is prepared to stand up to scrutiny from the IRS, a court, an auditor or the other side of a dispute. It follows professional appraisal standards (such as SSVS-1 or NACVA’s standards) and states a specific standard of value, an “as of” date and the exact interest being valued. It comes in two main forms:
Valuation engagement
The analyst uses whatever procedures they judge appropriate and delivers a detailed report. The valuation equivalent of an audit, with a cost to match.
Calculation engagement
Analyst and client agree on a narrower set of procedures. Closer to compiled financial statements: faster and less expensive, but it may not contain every element of a full valuation.
A transaction value estimate asks something different: if I took this company to market, what price could I reasonably expect? That is the question most owners actually have in mind when they first call us. Answering it means thinking like the buyers who would show up, not like a tax examiner.
“Fair market value” is not what most owners think it is
To most people, “fair market value” means what the business would sell for on the open market. In valuation, it means something narrower and far more theoretical.
The standard traces back to IRS Revenue Ruling 59-60, which defines it as the price at which property would change hands between a willing buyer and a willing seller, neither under any compulsion to act and both having reasonable knowledge of the relevant facts.
It assumes a transaction between a generic willing buyer and willing seller rather than a specific or strategic acquirer who might pay a special synergy premium.
Neither party faces pressure or distress to complete the transaction (excluding fire sales, liquidations, or forced transfers).
Both parties possess reasonable, realistic knowledge of the relevant facts regarding the business and its operational market.
The exchange represents a transaction for cash or its equivalent at a distinct point in time.
The key word is hypothetical. Fair market value does not picture a real buyer with real synergies, a real competitive auction or a real strategic reason to stretch on price. It pictures a generic, financially motivated buyer who brings nothing special to the table.
Fair market value also looks at the specific interest being valued, and that is where the biggest surprises come from. If the interest lacks control or can’t easily be sold, the analyst must account for that with discounts:
Discount for lack of control (DLOC)
A minority owner can’t set strategy, pay distributions or force a sale. Estimated as the inverse of control premiums paid in acquisitions, the DLOC is often around 30%.
Discount for lack of marketability (DLOM)
There is no ready market to turn a private-company interest into cash. Restricted-stock and pre-IPO studies put these discounts anywhere in this range; transfer restrictions can push them higher.
Applied together, these discounts can take a large bite out of value. That is entirely appropriate for an estate or gift tax filing on a 20% interest. It is the wrong lens for an owner trying to understand what a buyer would pay for 100% of the company.
In short, fair market value is a well-defined legal and tax concept. It is not a forecast of sale price.
The standard of value shapes what you receive
The purpose of a valuation determines its end product, and the standard of value is how that purpose is written into the engagement. Change the standard and you change the buyer being imagined, whether discounts apply and, often, the answer.
| Standard of value | Who is the buyer? | Discounts? | Where it’s used |
|---|---|---|---|
| Fair Market Value | Hypothetical willing buyer and seller | YesFor lack of control and marketability | IRS reporting (estate, gift, income tax); many operating and buy-sell agreements |
| Fair ValueFinancial reporting | Market participants (ASC 820 / IFRS 13) | Usually none | Purchase price allocation, goodwill impairment; also seen in shareholder oppression cases |
| Investment ValueAlso called strategic value | A specific, identified buyer | Not typically | Pricing a deal with a known buyer; not used for reporting |
| Intrinsic Value | None; the asset’s “actual” value | Varies | No standard definition; the standard for marital dissolution cases in Virginia |
| Marketable Transaction ValueOur standard | A qualified, real-world market participant | NoWhole company changing hands | Sale planning, exit readiness, setting buyer and seller expectations |
Common standards of value used in formal engagements, alongside the standard we use for transaction value estimates.
“The price that could reasonably be expected in a negotiated transaction between the Company and a qualified market participant.”
None of the formal standards cleanly answers “what would my company bring in a sale?” This one does.
Marketable Transaction Value: the question owners are really asking
Each part of that definition does work. Negotiated transaction means a real deal with real give-and-take, not a theoretical exchange. Qualified market participant means the kinds of buyers who actually acquire companies like yours, whether private equity groups, strategic acquirers or well-capitalized individuals, with the financing and motivation to close. And because we are looking at the company as a whole changing hands, minority and marketability discounts drop out of the picture.
The result reflects how deals are actually priced: the multiples buyers are paying, the market’s appetite for your industry and size, and the factors that make a buyer lean in or walk away.
2019 calculation of value (Fair Market Value) · about 6.5x EBITDA on $17.7M of revenue
October 2021 sale price · roughly 26x EBITDA
In 2019, our firm worked with two partners in a highly profitable consulting firm who were parting ways. We initially were engaged to conduct a calculation of value, under a Fair Market Value standard, to help the partners negotiate a deal amicably. We valued the company at $25.7 million, about 6.5x EBITDA on $17.7 million of revenue. The partners couldn’t agree on the value, the dispute went to arbitration, and they settled two years later. Less than a year after the settlement, the remaining partner sold the company for $105 million, roughly 26x EBITDA.
Part of that gap came from growth; revenue had climbed to about $25 million in the two years since our initial valuation. But much of the gap reflects the difference between value and price. A buyer with its own strategic reasons paid far more than a buyout analysis would ever support. Neither answer was “wrong.” They answered different questions.
Which one do you need?
If someone other than you will rely on the number, such as the IRS, a court, an auditor or a counterparty, you most likely need a formal valuation. If the number is for your own planning and decision-making, an estimate of Marketable Transaction Value is usually the better fit.
A formal valuation is appropriate for
- Estate and gift tax filings, and other IRS reporting
- Litigation support, including divorce, shareholder disputes and damages
- Partner buyouts governed by a buy-sell or operating agreement that names a standard of value
- ESOP transactions
- Financial reporting, such as purchase price allocation and goodwill impairment testing
A Marketable Transaction Value estimate is appropriate for
- Deciding whether now is the right time to sell
- Setting realistic expectations before engaging an investment banker
- Evaluating an unsolicited offer
- Exit and succession planning several years out
- Understanding which value drivers would move your price the most
The two are not substitutes. A fair market value report filed for gift tax purposes will usually understate what a buyer would pay for the whole company. A transaction value estimate won’t satisfy the IRS or hold up in court. Commissioning the wrong one costs money and can lead to poor decisions.
Know what you need before you ask
At Middle Market Value, we help owners with both questions. Through Cornerstone Valuation, we provide formal valuations, including full conclusions of value and calculation engagements, built to meet professional standards and withstand scrutiny from the IRS, courts and other outside parties. Through Windward Advisors, our M&A practice, we see every day what buyers actually pay. That market perspective informs our Marketable Transaction Value estimates and carries through when an owner decides to go to market.
Our goal is to make sure you know which question you are asking before you pay for an answer. Sometimes that means a formal report. Sometimes it means an honest read on what the market would bear. Sometimes it means both, at different stages.