Author: SME Business Appraisers
Before comparing figures, always specify what is being valued, on what date, and for what decision.
An accountant receives a valuation report prepared by a Chartered Business Valuator (CBV) for their client: the fair market value (FMV) of the shares is set at $5 million. Six months later, a purchase offer of $3.8 million arrives.
The classic question immediately arises: “Which of the two numbers is correct?”
The most honest answer is simple: the question is poorly worded. Fair market value and selling price do not measure the same thing, do not meet the same need, and often do not refer to the same object or the same date. Comparing them without adjustment is like comparing the temperature in Gatineau in February to that in Montreal in July and concluding that a thermometer is faulty.
The key takeaway: Before placing two amounts side by side, it is essential to align three parameters: the object, the date, and the decision in question. Everything else follows from that.
Fair Market Value: A Theoretical Construct
Fair market value (FMV) is not an observed actual price, but a reasoned conclusion developed within a hypothetical market.
- CBV Institute definition: In translation, fair market value is the highest price, expressed in cash equivalents, obtainable in a freely competitive market between hypothetical buyers and sellers who are willing and able to transact, acting at arm’s length, under no compulsion, and reasonably informed of the relevant facts.
- Legal definition: Canadian case law (Henderson Estate v. M.N.R.) confirms that this is the price forged “on the anvil of supply and demand” in an open market, without compulsion and free from undue pressure.
In this theoretical framework, the buyer and seller are rational, the market is exposed to all potential buyers, and the transaction is settled in cash.
This is what the CBV Institute calls notional valuations. They are required in the absence of a real market: tax reorganizations, shareholder disputes, matrimonial property regimes, or purchase and sale agreements.
Fair market value therefore answers the question: “What would this interest be worth in an ideal market at a specific moment?”
The Selling Price: An Empirical Reality
The price is straightforward: it is the exact consideration that a real buyer agreed to pay a real seller during an actual negotiation.
The price bears the mark of all the human and economic factors that FMV seeks to neutralize:
- The balance of power and the urgency of selling or buying.
- Access to financing and liquidity conditions.
- The unique synergies of a strategic buyer willing to pay a premium.
- The founder’s emotions.
- The payment structure (vendor take-back financing, indexation or earn-out clauses, share rollover).
Pay attention to the structure: A nominal price of $5 million paid over 5 years and conditional on future earnings does not have the same value as a fair market value of $5 million payable 100% in cash at closing.
The Three Parameters to Align Before Comparing
To meaningfully compare a valuation and a purchase offer, analyze these three elements:
A. The Object Being Valued
A valuation report can cover 100% of the shares, a 30% minority interest, or a company’s net operating assets. Conversely, a purchase offer often covers a different scope (e.g., acquisition of assets only, excluding the building or excess cash). Comparing the fair market value of all the shares with an offer for only the business assets is a common mistake.
B. The Valuation Date
Value is a photograph, never a film. CBV Institute Standard No. 110 requires explaining the exact economic context at the precise date of the valuation. Between the date of a tax valuation and the receipt of an offer 12 months later, interest rates, the loss of a key client, or industry conditions can radically alter the situation.
C. The Decision in Question
The purpose changes the approach:
- Taxation (e.g., estate freeze, section 85 of the Income Tax Act): Requires strict adherence to the assumptions of the notional market.
- Strategic sale: May incorporate the analysis of synergies and special purchasers.
Why a Discrepancy Is Not Necessarily a Mistake
A difference between fair market value and selling price does not mean the valuation is wrong. It simply reflects the specifics of the real market:
- The buyer had specific synergies to exploit.
- The seller was constrained by time or health.
- Information between the parties was asymmetric.
As Justice Cattanach pointed out in the Henderson Estate case, the goal of a valuation is to establish a defensible and reasoned fair market value, not an “absolutely exact” value down to the cent.
FMV offers an anchor point; the price reflects a negotiation.
What This Changes for Your Files
For accountants, lawyers, tax specialists, and bankers, the golden rule is to ask the right starting question:
“Do the two amounts being analyzed refer to exactly the same object, on the same date, and for the same decision?”
In most cases, the answer is no, which explains most of the difference without needing to question discount rates or multiples.
This approach protects the client by preventing a tax valuation from being wrongly used as a floor price during negotiations, or an offer made under pressure from compromising rigorous tax planning.
This article is written by SME Business Appraisers, a firm specializing in establishing the fair market value of Canadian companies.
Are you wondering if a business valuation is relevant for your business or a client’s business? Visit our website or contact our team for a free consultation.
Phone: +1 877-734-4030
E-mail: info@jcdesnoyers.ca
Address: 95, Technologie Blvd., unit 103, Gatineau, QC, J8Z 3G4
Website: https://jcdesnoyers.ca/en/
Sources
- Revenu Québec, “Fair Market Value (FMV),” official definition.
https://www.revenuquebec.ca/fr/definitions/juste-valeur-marchande - Canada Revenue Agency, “Fair Market Value,” transfer of property to a business.
https://www.canada.ca/fr/agence-revenu/services/impot/entreprises/revenu-petites-entreprises-travailleurs-independants/etablir-votre-entreprise/apport-biens-entreprise/juste-valeur-marchande.html - Henderson Estate v. M.N.R., 73 DTC 5471, [1973] CTC 636 (F.C. Trial Div.), aff’d 75 DTC 5332 (F.C.A.). Full text reproduced by Tax Interpretations.
https://taxinterpretations.com/content/353347 - CBV Institute, “Business Valuation” (notional valuations and contexts of use).
https://cbvinstitute.com/evaluation-dentreprises?lang=fr - CBV Institute, “Countdown to 2026: Strengthening Report Disclosures (Part 1),” revised Practice Standard No. 110, effective January 1, 2026.
https://cbvinstitute.com/countdown-to-2026-strengthening-report-disclosures-part-1 - Jean-Claude Desnoyers, FCPA, CBV, “Standard No. 110 of the CBV Institute” (reporting levels and minimum content).
https://jcdesnoyers.ca/en/standard-no-110-of-the-cbv-institute - Business Development Bank of Canada, Patricia Narbaitz, “Value vs. price: Understanding the difference when buying or selling a business.”
https://www.bdc.ca/en/articles-tools/blog/value-vs-price-understanding-difference-buying-selling-business - Davis Martindale LLP, Ron Martindale and Korab Ferati, “Is Fair Market Value the Price of the Business? Fair Market Value vs. Price,” April 8, 2025.
https://www.davismartindale.com/blog-fair-market-value-vs-price - NinjaTech AI.
- ChatGPT and Canva for the image.
Signed by Jean-Claude Desnoyers, FCPA, CBV, EEE.
Note: This post provides general information and does not constitute professional advice or a valuation report. Each situation requires an analysis specific to its facts, date, and purpose.
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