Chapter One

Mary said to me, "I got a deal! I bought 'X' and I paid 'Y' dollars for it!" My perception of her deal compelled me to say, "You paid what?!" As you already know, each person's observation of the same event can normally be counted upon to be quite different. This, of course, is true about value in small companies.

We must let go of old assumptions that we know how things work regarding price and value in small, closely held companies. We really don't. For one thing, the earmarks of entrepreneurs are their independence and nonconformance with traditional practices. Quite frequently, they will be found never agreeing on anything from the past. For another, they are not bound by the decisions passed down by a corporate board of directors.

The model definition of fair market value used by most professional appraisers tends to revolve around several connected definitions provided in Black's Law Dictionary. The terms "cash market value," "fair market value," "reasonable market value," and "fair cash market value" are substantially synonymous terms and mean the highest price the property would bring free of encumbrances, at a fair and voluntary private sale for cash. At first blush, this crisp and straightforward concept seems rather easy to understand.

I'd now like you to read this same definition with its inherent conceptual fallacy exposed ... and, also, present it in the light of the small-company transaction.

'Fair market value' (FMV) is not designed with any particula