Authored By: Patrick Lowry
When valuing a business—or even just a minority stake in one—understanding the standard of value being applied is essential. Different standards can lead to very different conclusions. Whether the purpose is estate planning, shareholder litigation, ESOP compliance, or preparing for a sale, the valuation framework needs to align with the intent.
Two of the most common standards of value are Fair Market Value (FMV) and Strategic Value. Although both rely on established valuation methods, the assumptions and context behind each standard can lead to significantly different results.
What Is Fair Market Value?
Fair Market Value is the standard most often used in tax-related valuations, such as estate and gift planning, 409A compliance, and valuations for marital or shareholder disputes. It is defined by the IRS as:
“The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.”
Key attributes of FMV:
- Assumes a hypothetical buyer and seller.
- Focuses on the company as a stand-alone entity.
- Excludes buyer-specific synergies or strategic advantages.
- May apply discounts for lack of control or marketability based on the specific interest being valued.
Because FMV assumes the buyer is an unrelated third party, it reflects the price that could reasonably be expected in an open and competitive market, without any special advantages influencing the transaction.
What Is Strategic Value?
Strategic Value reflects the value of a business to a specific buyer, typically one who could derive unique benefits from the acquisition—such as a competitor, supplier, or company in a related industry. This standard is most relevant when evaluating a business in the context of a potential sale or merger.
Strategic Value includes:
- Potential revenue and cost synergies (e.g., eliminating redundancies, integrating supply chains, or leveraging an existing sales force).
- Assumptions about the buyer’s ability to enhance the company’s performance post-acquisition.
- Typically reflects a control-level interest and assumes the company will not continue to operate independently.
As a result, Strategic Value is often higher than Fair Market Value—sometimes significantly—because it includes value from anticipated synergies that are unique to a specific buyer.
Why Your Purpose Drives the Valuation Approach
The valuation method and resulting value are not one-size-fits-all. Choosing between Fair Market Value and Strategic Value depends entirely on the objective of the valuation:
Aligning the valuation standard with the purpose ensures the result is credible, defensible, and relevant to the decisions being made.
Comparing the Two Standards
While the purpose of the valuation points you in the right direction, it’s also important to see how these two standards differ in practice. The comparison below breaks down the core elements that set Fair Market Value and Strategic Value apart.
While the purpose of the valuation points you in the right direction, it’s also important to see how these two standards differ in practice. The comparison below breaks down the core elements that set Fair Market Value and Strategic Value apart.
Choosing the Right Valuation Lens Matters
The difference between Fair Market Value and Strategic Value isn’t just technical—it directly influences how owners plan, how transactions are structured, and how value is ultimately realized. A valuation built on the wrong standard can lead to inaccurate conclusions, missed opportunities, and unintended consequences.
If you’re navigating a valuation need—whether for planning, compliance, or a potential transaction—our team can help you determine the right approach for your goals. Connect with us to start the conversation.
