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Fair market value

I. Definition


Various authorities provide their definition of the term ‘Fair Market Value’.1 These definitions, though similar, are not identical and, therefore, leave some ambiguity regarding the exact meaning of fair market value.2


A commonly used definition of the fair market value is provided in the International Glossary of Business Valuation Terms3 and is used by arbitral tribunals:4 “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” Other tribunals have adopted similar definitions.5


Therefore, key features of the fair market value of an asset, among others, are that:

  1. the parties involved “do not have a particular or special relationship” (i.e. are acting at arms length);6
  2. the price paid reflects a hypothetical transaction, in which parties are well informed and not under any compulsion to buy or sell;7 and
  3. the property is sold in an “open and unrestricted market” where participants are acting freely and competitively, and where there are no restrictions on the sale of the property.8 In such a market, the fair market value of the property “will reflect its highest and best use”, be that for the “continuation of an asset’s existing use or for some alternative use.”9

II. Distinction from other related concepts


The base of value (such as the fair market value) must reflect the purpose of the valuation exercise.10 The IVS provides several alternative bases of value, including:

  1. The Equitable Value “requires the assessment of the price that is fair between two specific, identified parties considering the respective advantages or disadvantages that each will gain from the transactions.11 These specific advantages or disadvantages will generally be disregarded in an FMV assessment.
  2. The Investment Value is “the value of an asset to particular owner or prospective owner for induvial investment or operational objectives.12
  3. The Liquidation Value “is the amount that would be realised when an asset or group of assets are sold on a piecemeal basis.13

III. Calculation of fair market value in international arbitration


Calculating the exact fair market value of an investment can be complicated and arbitral tribunals may then have recourse to “a variety of techniques whose purpose is to arrive at an approximation of what that fair market value would be if such a fair market existed in fact.”14

A. The income approach – discounted cash flow

See note on Discounted Cash Flow.


The income approach “provides an indication of value by converting future cash flow to a single current value”.16 The income approach (e.g. DCF or Discounted Cash Flow method) is well founded in financial theory and the most commonly used valuation approach.17 It is, however, often rejected by tribunals as too speculative,18 in particular when historical track records are missing.19

B. The market approach


The market approach “provides an indication of value by comparing the asset with identical or comparable […] assets for which price information is available.”20 Several arbitral tribunals applied this method to assess the investment’s value.21 The most common methods are the comparable transactions method22 and the guideline publicly-traded comparable method.23 Other tribunals considered to the contrary that no comparable market existed.24

C. The cost approach


The cost approach “provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility […].”25 Since most businesses are worth more than the sum of their individual assets, the cost approach often provides an indication of the floor of the value of an asset.26


Global Arbitration Review, The Guide to Damages in International Arbitration, 3rd ed., 2018.

International Valuation Standards Council, International Valuation Standards 2017, 2017.

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