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Fair Market Value FMV
Also called FMV, market value, FMV purchase option.
The price a willing buyer and willing seller would agree, neither compelled and both informed — and, in an equipment lease, the basis of a purchase option whose dollar amount is unknown when you sign.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The definition is easy and the application is where the money is, because the same asset carries several defensible values at once.
A machine can appraise at $200,000, $120,000 and $70,000 under those three definitions. A secured lender advances against the liquidation figures, not against FMV, because liquidation is the scenario in which the number matters to it.
FMV in leasing
A fair market value lease gives you three end-of-term choices: return the equipment, renew, or buy it at its then fair market value. That is the feature that distinguishes it from a dollar-buyout or nominal-purchase-option structure and it is part of why the payments are lower. It also means the purchase price is not in the contract.
Who determines FMV, and how, is set by the lease. Common mechanics: the lessor's determination, binding; the lessor's determination subject to a cap expressed as a percentage of original equipment cost; or an appraisal process with each side appointing an appraiser and a third resolving a disagreement. Which one you have decides how much the end of the lease costs.
Elsewhere
FMV also drives real estate appraisals on SBA and bank loans, business valuations on change of ownership, insurance settlement on a total loss, and purchase price allocation in an asset sale.
Where this one catches people
In a fair market value lease, the purchase price at the end is the lessor's number unless you negotiated a cap or a defined process before signing. Businesses budget on the payment schedule, treat the buyout as a formality, and are quoted a figure at month 60 that materially changes what the equipment cost. There is no leverage at that point: the alternative is returning a machine your operation is built around, plus meeting return conditions on wear, hours and reconditioning that are their own line item.
Negotiate three things at signing. A cap on the purchase option as a stated percentage of original cost. A written appraisal mechanic if there is no cap. And the return conditions in full, so the "just give it back" alternative is a real one rather than a bill.
Worked through
Illustrative only. A 60-month fair market value lease on a $120,000 machine, at $2,200 a month.
Rent paid over the term: 60 × $2,200 = $132,000.
At the end, the lessor determines fair market value at $21,000 and offers to sell. Total cost of ownership: $132,000 + $21,000 = $153,000.
Had the option been capped at 10 percent of original equipment cost, the purchase would have been $12,000 and the total $144,000.
The $9,000 difference was not decided by the market at month 60. It was decided by a sentence nobody negotiated at month zero.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Fair Market Value — common questions
What does fair market value mean?
The price a willing buyer and willing seller would agree, neither compelled and both informed — and, in an equipment lease, the basis of a purchase option whose dollar amount is unknown when you sign.
Where does fair market value catch people out?
In a fair market value lease, the purchase price at the end is the lessor's number unless you negotiated a cap or a defined process before signing. Businesses budget on the payment schedule, treat the buyout as a formality, and are quoted a figure at month 60 that materially changes what the equipment cost. There is no leverage at that point: the alternative is returning a machine your operation is built around, plus meeting return conditions on wear, hours and reconditioning that are their own line item.
Is fair market value the same as an interest rate?
Fair Market Value is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does fair market value apply to?
Term Loan, SBA Loan, Equipment Financing, Asset-Based Lending.
Is there a worked example of fair market value?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside fair market value?
Advance rate, Appraisal, Buyout, Capital lease, End-of-term option.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.