Under the fair market value standard, the hypothetical buyer is assumed to be a purely financial buyer seeking a return on the investment. The “financial buyer” lacks synergies or strategic benefits associated with the transaction. As a result, the fair market value estimate is typically lower than the “strategic value” estimate, which is based upon the price that encompasses synergies or strategic benefits that could be obtained through the acquisition. Therefore, the price that a strategic buyer typically is willing to pay for the company is equal to the fair market value estimate plus the value of any synergies associated with an acquisition of the company.

To arrive at the fair market value estimate, the business valuation professional (or “appraiser”) must examine a number of factors associated with the company such as its history, financial condition, earnings capacity, dividends, industry and economic conditions, etc. The appraiser may also make adjustments to the financial statements of the closely held and family controlled company to remove any non-recurring items or perquisites to the owners. Adjustments are also made to remove any real estate owned by the company that should be appraised separately by a real estate appraiser. These adjustments are made, when reliable estimates are available, to adjust book values to market values and to provide a value based on future earnings that would not include controlling decisions regarding discretionary expenses. These factors are then incorporated into the overall analysis of the company to determine the value drivers as well as specific company risk factors that may have an impact on the value of the company.