The genesis of what we now call the Integrated Theory of Business Valuation was my 1997 book, Quantifying Marketability Discounts. That book introduced the Quantitative Marketability Discount Model (QMDM) to the business appraisal profession and focused on shareholder level cash flows. The QMDM was, and is, a shareholder-level discounted cash flow model. In my 2004 book, The Integrated Theory of Business Valuation, we focused the integrated theory on valuation at both the enterprise and shareholder levels of value. Then in 2007, we released Business Valuation: An Integrated Theory, Second Edition and the third edition was released in 2021. It’s evident that the integrated theory has been around now for many years.  In this week’s post, we begin to relate the integrated theory to the standard of value known as fair market value.

As we continue in this series on Revenue Ruling 59-60 and fair market value, we now analyze the factors used to describe the standard of value. In this post, we discuss Revenue Ruling 59-60’s “basic eight” factors for consideration in fair market value determinations. In addition, we dig into the “critical three” factors mentioned in Revenue Ruling 59-60 – common sense, informed judgment, and reasonableness.

In this fourth post in our series on Appraisal Review, we discuss definitions of fair market value. Fair market value is the most common standard of value employed by business appraisers. It is the standard for gift and estate tax and charitable giving matters as well as for many other appraisal requirements involving the federal government. And it is the most frequently used standard of value in buy-sell agreements and in other business arrangements requiring opinions of value. Despite its frequent employment, it is my observation that fair market value is not nearly as well-understood by business appraisers, attorneys, and courts as it should be.

The levels of value chart for business valuation relates the various “levels” of value to one another on a conceptual basis. It was first published in 1990. This chart recognized what the markets and business valuation analysts had roughly understood for some time about “levels” of value of businesses. 

So what do the conceptual levels of value have to do with fair market value and what does all this have to do with appraisal review?  We review two levels of value charts containing three and four conceptual levels, respectively. In an appraisal, it is critical to specify the appropriate level of value. In appraisal review, it is perhaps even more critical to understand appraisal assignments and reach reasonable conclusions regarding the appropriate level of value. How else can a reviewer reach a valid opinion regarding the quality and appropriateness of the work of another appraiser? How else can a reviewer reach a valid opinion regarding the reasonableness of the conclusion of a report under review? And we have not yet attempted to define fair market value.