Why Fair Market Value Is Destroying Your Exit Strategy
Most business owners treat FMV as their ceiling when smart sellers use it as their floor. Understanding this distinction can add millions to your exit.
You’ve built a great business over 15 years. A buyer offers you “fair market value” and you think, “Finally, someone who gets it!” Wrong. Dead wrong. That FMV valuation? It’s designed to be the minimum you should accept, not the maximum you can achieve. Here’s why most sellers leave millions on the table.
10 KEY TAKEAWAYS - FMV AS YOUR FLOOR
FMV is mathematical, not emotional: Fair Market Value represents the hypothetical price between fictional parties under perfect conditions that never exist in real transactions.
Smart sellers treat FMV as their floor: If you’re accepting FMV, you’re accepting the absolute minimum your business is worth, not what sophisticated buyers will actually pay.
The willing party assumption is fiction: Real buyers are never just “willing,” they’re motivated by competitive pressure, strategic positioning, and FOMO that drives premiums above FMV.
Information asymmetry creates opportunity: The FMV assumption of “equally informed parties” never exists, and understanding this creates negotiating leverage for prepared sellers.
Synergies are excluded from FMV: The biggest value drivers in most transactions, cost savings and revenue synergies, are specifically excluded from FMV calculations yet represent where premium buyers pay most.
Multiple buyer types pay different premiums: Strategic buyers, financial buyers, and search fund operators all have different motivations that drive valuations significantly above FMV baselines.
Competitive bidding multiplies value: Creating competition among 6-9 qualified buyers generates scarcity and urgency that systematically drives prices 50-75% above FMV.
FMV assumes no time pressure: Real transactions involve timing pressures, competitive windows, and strategic opportunities that create premiums for sellers who understand buyer psychology.
Professional preparation justifies premiums: Buyers pay above FMV for businesses that are systematically de-risked, well-documented, and positioned for seamless integration.
Understanding FMV protects you from lowball offers: Knowing your FMV baseline prevents accepting insulting offers disguised as “fair” while positioning you to capture the premiums you’ve actually earned.
📚 READING PREREQUISITES
This post builds on fundamental valuation concepts from earlier YBAWS! chapters. Understanding how multiples work and why risk reduction drives enterprise value provides essential context for maximizing your exit above FMV.
Recommended Prior Reading:
YBAWS! Chapter 4: You Love Revenue, Cool, But I Am the Multiplier Man!
YBAWS! Chapter 6: Learn Real Valuation
Understanding Required Rates of Return and Risk Premiums
The FMV Definition Nobody Actually Uses
Fair Market Value has a specific definition that sounds reasonable until you think about it for five seconds. According to professional valuation standards, FMV is “the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash.”
Let’s break down why this definition describes a transaction that literally never happens in the real world.
“Informed and prudent parties” assumes buyers and sellers have equal information. In 30 years of M&A transactions, I’ve never seen this. Buyers always know more about their integration capabilities, synergy potential, and strategic alternatives. Sellers always know more about customer relationships, operational nuances, and hidden risks. Information equality is a fantasy.
“Acting at arm’s length” means no special relationship between parties. But the best transactions always involve relationship building, trust development, and strategic alignment. The most successful sellers I’ve worked with spent months cultivating relationships with multiple potential buyers, which directly violates the arm’s length assumption yet generates the highest prices.
“Under no compulsion to act” is perhaps the most laughable assumption. Every real transaction involves some form of compulsion. Maybe it’s a key employee threatening to leave, a competitor gaining market share, a strategic window closing, or a founder’s health concerns. Pure theoretical “willingness” without any motivating pressure simply doesn’t exist in business reality.
The definition is useful for tax disputes and estate planning, but it’s designed to establish a conservative baseline, not describe real market transactions.
Why Smart Sellers Use FMV as Their Floor
