The FMV Fiction: Why ‘Willing Parties’ Don’t Exist in Real M&A
Fair Market Value assumes willing buyers and sellers acting rationally. In 30 years of deals, I’ve never seen it. Here’s what actually drives transactions.
Willing buyer, willing seller, both equally informed, neither under compulsion.” That’s the Fair Market Value standard. It’s also complete fiction. Real M&A transactions involve competitive pressure, information asymmetry, strategic urgency, and psychological warfare. Understanding the gap between FMV theory and transaction reality can add millions to your exit.
10 KEY TAKEAWAYS - THE FMV REALITY GAP
The “willing party” assumption never exists: Every real transaction involves motivation, urgency, competitive pressure, or strategic windows that create compulsion beyond simple willingness.
Information equality is impossible: Buyers always know more about integration capabilities and synergies while sellers always know more about operational nuances and hidden risks.
Arm’s length transactions miss the best prices: The highest transaction values come from relationships, trust building, and strategic alignment that explicitly violate arm’s length assumptions.
Time pressure exists in every deal: Strategic windows close, competitors make moves, key employees leave, and founders age, creating urgency that FMV assumptions explicitly exclude.
Buyer psychology drives premiums: Fear of missing out, competitive positioning, and strategic necessity make buyers pay above theoretical FMV when they believe losing the deal would be catastrophic.
Market conditions fluctuate constantly: FMV assumes stable, normalized conditions while real transactions occur in dynamic markets with shifting supply, demand, and strategic priorities.
Relationship building creates value: The best transaction outcomes come from sellers who spend months cultivating multiple buyer relationships, creating trust and competitive tension.
Professional advisors bridge information gaps: M&A advisors, investment bankers, and business brokers exist precisely because information asymmetry drives transaction value.
Strategic fit justifies premium pricing: When a buyer sees your business as the perfect puzzle piece for their growth strategy, they pay above generic FMV because losing the opportunity costs more.
Understanding these gaps is your competitive advantage: Sellers who recognize how real deals differ from FMV theory position themselves to capture premiums that amateurs leave behind.
📚 READING PREREQUISITES
This post examines the gap between valuation theory and M&A reality, building on foundational concepts about how businesses are actually valued in practice versus how they’re valued in theory.
Recommended Prior Reading:
YBAWS! Chapter 6: Learn Real Valuation
YBAWS! Chapter 7: Fair Market Value and the Magic Carpet Ride
Understanding Buyer Psychology in Business Transactions
The Fictional Willing Buyer and Seller
Let’s start with the central fiction in Fair Market Value definitions: “willing buyer and willing seller, neither under compulsion to act.”
In three decades of M&A transactions, I’ve never met these mythical creatures. Real buyers aren’t just “willing,” they’re strategically motivated, competitively pressured, or desperately seeking specific capabilities your business provides.
Strategic buyers face compulsion from competitive dynamics. If they don’t acquire your specialized manufacturing capability, their competitor will, potentially locking them out of key markets for years. That’s not “willingness,” that’s strategic necessity creating urgency and premium pricing.
Financial buyers operate under compulsion from capital deployment mandates. Private equity firms raise funds with specific deployment timelines and return requirements. They’re not casually “willing” to buy businesses, they’re actively hunting for deals that fit their models before their competition finds them.
Search fund operators face extreme compulsion. They’ve raised capital specifically to acquire one business as their career-defining opportunity. If they don’t find the right platform within 18-24 months, their entire professional trajectory collapses. That’s maximum compulsion creating maximum willingness to pay premiums.
Meanwhile, sellers face their own compulsions. Founders age, key employees threaten departure, health issues emerge, market windows open and close, and competitors make strategic moves that change everything. The idea of a seller patiently waiting with zero time pressure is fantasy.
The Information Equality Myth
FMV assumes “informed and prudent parties” with equal information. This might be the most ridiculous assumption in the entire definition.
Buyers always know more about certain critical factors:
