The definition of fair market value is axiomatic among every student of finance, economics, accounting, marketing and law:

Fair market value is the price that a willing buyer would pay a willing seller for something when the buyer has neither a compulsion to buy nor the seller a compulsion to sell.

Why is it then that the owner of a closely held business or the senior executive of a public corporation is caught off guard by the impact that macroeconomic and financial-market events have on the value of ownership interests? Perhaps it is due to the nature of valuation itself as a point-in-time price that a willing buyer would pay a willing seller whether on a public exchange or in a private equity transaction.

Seen in another way, the great debate over mark-to-market accounting rules focuses on whether assets required to be valued at current fair market prices should be adjusted to account for the unwillingness of owners to sell at depressed prices.

When sellers are not compelled to sell at historically low prices, buyers are not able to buy. Thus, fair market value transactions simply do not take place. The market for private equity has clearly evidenced this over the past year. Despite a repricing of the value of closely held businesses by all traditional metrics, the deal flow has slowed to a crawl. Similarly, the public-company executive holding company stock or stock options is constrained from selling due to a genuine belief that the stock is not being valued fairly.

It is critical to help clients recognize and plan for the effect unforeseeable events have on the ability to maximize the value of assets. Private equity interests and, in the case of public-company executives, company stock or options, experience wide swings in value. A compulsion to sell can happen when stock-option grants are expiring or when trust is breaking down among family members regarding governance of the family business. My responsibility as an advisor is to help clients attain fair value and avoid compulsive selling situations.