What is the fair market value of a business?

Fair market value is a term used both in BDC’s valuation guidance and in the Income Tax Act. It is not a single fixed number, and no formula produces it for every company. This page explains how BDC and the Income Tax Act use the idea, so an owner knows what a valuator’s figure is aiming at.

An arm’s-length price

BDC says valuators generally offer a price range that the company would probably sell for to an arm’s-length party. It explains this as a buyer who has no reason to pay a higher or lower price than fair market value, and gives the example that a family member may be able to get a cheaper price. BDC adds that smaller companies and some sectors can expect a wider range.

Methods give different numbers

BDC says each valuation method may yield a different value, and that the highest of these values usually reflects the fair market value of the business. BDC’s article on negotiating a sale defines the asset-based method as summing the fair market value of tangible and intangible assets, then subtracting liabilities. BDC also lists using the book value of assets rather than fair market value among common valuation errors. See how to value a business in Canada.

Where tax law uses the term

Section 69 of the Income Tax Act, except as the Act expressly provides otherwise, deems fair market value to apply to certain transfers, including some between persons not dealing at arm’s length. Where a taxpayer acquired something from a person not dealing at arm’s length at an amount above fair market value, the taxpayer is deemed to have acquired it at that fair market value. So a price agreed between related parties may not settle the question for tax.