What is a fair market value?
Fair market value is the value that a business or asset would have if sold for a fair price on the market. To find it, you may ask yourself: If Joe were selling this, what price would Jane buy it for?
That is, of course, a simplification. If Joe or Jane is misinformed about some aspect of the thing being sold, either could lose out in the deal. Courts have ruled that a fair market value must assume a significant degree of competence and knowledge on both sides.
By definition, fair market value isn't a set number. I might be willing to sell my lemonade stand company for anywhere from $500 to $600 and you might be willing to be buy it from $300 to $500. In that case, $400 would be a fair market value and so would $500.
What situations require one?
Is Jane about to issue stock in his private company? Does Joe need to know how much his company should pay in taxes?
These and many other situations where a company needs to know its worth could call for a fair market value.
How is fair market value calculated?
Many factors come into play. A fair market value calculation is pretty much a regular valuation but done from the perspective that is should reflect the market price.
Calculating the fair market value of a business is a lot like a normal business valuation. Some issues to be considered include: 1) the general history of the company: how is it performing? what industry is it in? who are its leaders? 2) the company's current finances: what do its balance sheets say in terms of liquidity, debt, capital - and more? is there stock? if so, what sort? 3) are there intangiable factors at play?