What is a standard of value in a business valuation?

A standard of value is the definition of value a valuation is built on. CBV Institute’s glossary gives fair market value, market value, fair value and investment value as examples, and says the standard affects the methods, inputs and assumptions used by the business valuation professional. This page explains the terms the glossary and the sources below use.

Fair market value

The glossary describes fair market value as the price, in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and seller, each acting at arm’s length in an open and unrestricted market, neither under compulsion and both with reasonable knowledge of relevant facts. The CRA’s Information Circular 89-3, which sets out the CRA’s valuation policy for income tax purposes, defines it as the highest price, in money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact. BDC says the valuator determines a stand-alone fair market value to an arm’s-length party, without potential synergies or strategic considerations from the buyer.

Fair value and investment value

The glossary says fair value has different definitions depending on context and purpose, and is typically defined or imposed by a third party, such as law, regulation or contract. One example is the Canada Business Corporations Act, s.190. Subject to sections 191 and 241, it lets a holder of shares dissent in the cases it lists, which are certain resolutions and an order under paragraph 192(4)(d) that affects the holder. In addition to any other right, but subject to subsection (26), a dissenting shareholder who complies with the section is entitled, when the action approved or the order becomes effective, to be paid the fair value of the shares, determined as of the close of business on the day before the resolution was adopted or the order was made. Subsection (26) bars payment if there are reasonable grounds for believing the corporation is or would after the payment be unable to pay its liabilities as they become due, or that the realizable value of its assets would be less than its liabilities. The Act applies to corporations incorporated or continued under it and not discontinued. Section 190 does not set out a valuation method: if no offer is made or accepted, a court may be asked to fix a fair value. The glossary defines investment value as the value to a particular owner or prospective owner for individual investment or operational objectives, also called value to the owner.

Why the final price can differ

BDC says the final transaction price is often different from a valuator’s figure, which it calls just a guideline for how to approach negotiations, and is influenced by many factors, such as the owner’s eagerness to sell, the buyer’s strategic interests or expected synergies, available financing, due diligence and the company’s capacity to transition. Ask the valuator which standard was used and why. See fair market value.