Key Takeaways

• Fair market value reflects what a willing buyer and seller would agree upon in an open, competitive market.
• Investment value captures the worth of a business to a specific buyer, based on their unique circumstances or synergies.
• Intrinsic value estimates what a business is truly worth based on its fundamentals—regardless of market or investor sentiment.
• The right valuation standard depends on the purpose—litigation, M&A, financial reporting, or shareholder transactions.

In business valuation, precision begins with knowing which standard of value applies. The same company can be worth very different amounts depending on the purpose of the valuation and the perspective being taken. For example, a business valued for tax reporting must meet very different criteria than one being purchased by a strategic acquirer.

Three commonly referenced standards—fair market value, investment value, and intrinsic value—each provide a distinct lens for interpreting worth. Understanding their differences is critical for stakeholders involved in mergers and acquisitions, shareholder disputes, litigation, or partner buyouts.

A few weeks ago, we were on a call with a business buyer and their lender discussing value. The buyer operated a related company and was confident about the cost savings and synergies he could achieve by combining operations.

He explained, “We can fold this business into our existing space, share administrative staff, and reduce rent—so it’s worth more to us.”

We agreed—for him, those synergies have real value. But we asked a key question: “That’s great, but why are you paying the seller for your value?”

Those savings represent investment value, not fair market value. They belong to the buyer, not the seller. That distinction—between what something is worth to you and what it’s worth in the open market—is at the heart of every defensible valuation.

Fair Market Value: The Objective Benchmark

Fair Market Value (FMV) is the most recognized and legally accepted standard of value. It represents the price at which property would change hands between a willing buyer and willing seller, both with reasonable knowledge of the relevant facts and neither under compulsion to act.

This definition—codified in IRS Revenue Ruling 59-60 and adopted in NACVA and USPAP standards—assumes rational, informed participants in an open, competitive market. FMV intentionally excludes synergies, personal motivations, or buyer-specific advantages.

Because of its neutrality, FMV and FV are required in estate and gift tax filings, SBA-financed transactions, ESOPs, divorce cases, and shareholder disputes. It’s the default standard when a valuation must be defensible before regulators or the courts.

Investment Value: The Price to a Particular Buyer

Investment Value, by contrast, reflects the worth of a business to a particular investor—based on that buyer’s unique circumstances, strategic fit, or synergies.

A buyer in the same industry may expect cost savings, expanded market share, or improved efficiencies that justify paying more than FMV. These buyer-specific advantages create investment value premiums.

However, those premiums are personal to the buyer and generally not transferable. That’s why investment value is useful in merger or acquisition negotiations, but inappropriate for tax or legal valuations requiring objectivity.

Intrinsic Value: The Economic Truth Beneath Market Perception

Intrinsic value aims to determine what a business is truly worth based on its fundamental performance and future prospects, without regard to current market sentiment or investor-specific factors. It is often derived using a discounted cash flow (DCF) analysis, in which expected future cash flows are projected and discounted back to their present value based on risk and return expectations.

Whereas fair market value captures what the market would pay today, intrinsic value captures what the business should be worth under rational, long-term assumptions. This distinction makes it especially relevant to investors focused on long-term performance, such as value investors or family offices seeking to hold an asset indefinitely.

Intrinsic value can be higher or lower than market value depending on how accurately the market reflects the company’s fundamentals. When markets are overheated or uncertain, intrinsic valuation provides a grounding perspective—an analytical anchor that reflects the company’s true earning capacity and growth potential.

Choosing the Appropriate Standard of Value

Selecting the correct standard is one of the first—and most critical—steps in any valuation engagement. The choice depends on purpose, audience, and regulatory requirements.

Purpose	Typical Standard of Value
SBA or bank financing	Fair Market Value
Estate or gift tax reporting	Fair Market Value
Partner or shareholder buyouts	Fair Market Value, Fair Value, or Investment Value (per agreement or statute)
Mergers and acquisitions	Investment Value (reflecting buyer-specific synergies)
Financial reporting (GAAP, ASC 805/820)	Fair Value
Financial analysis / portfolio management	Intrinsic Value

An experienced appraiser begins each engagement by clarifying the purpose, intended users, and context before determining which standard applies. Doing so ensures that the conclusion is both defensible and decision-relevant—two qualities that define credible valuation practice.

Why These Distinctions Matter

Two appraisers can both be technically correct and still arrive at different conclusions—simply because they used different standards of value.

Understanding these distinctions avoids mispricing, miscommunication, and legal exposure. Whether the purpose is an SBA loan, tax filing, merger, or shareholder dispute, aligning the standard of value at the outset is essential.

At BGH Valuation, every engagement begins with that alignment. We ensure that each valuation conclusion—whether Fair Market, Fair, Investment, or Intrinsic—is consistent with the valuation standards and fully defensible before lenders, regulators, or the courts.

FAQs

What’s the primary difference between fair market value and investment value?

Fair market value represents a neutral exchange between independent parties in an open market. Investment value reflects what the business is worth to a specific buyer or investor, considering their unique goals or synergies.

Is intrinsic value used in legal or tax settings?

Generally not. Intrinsic value is an analytical concept used primarily in investment analysis. Legal and tax valuations typically require fair market value or fair value because it aligns with statutory and regulatory definitions.

Which standard applies in a partner buyout?

The buy-sell agreement should define the applicable standard. If it does not, valuation professionals typically recommend using Fair Market Value for neutrality, unless the partners explicitly intend to reflect one party’s unique advantages, in which case Investment Value may apply. However, Fair Value may also govern a forced partner buyout or dissenting shareholder action, depending on state regulations or the applicable business corporations act. In those cases, Fair Value—defined by statute—may differ from Fair Market Value, often eliminating minority or marketability discounts to ensure equitable treatment.