What Is the Standard of Value in Divorce?

Apr 11, 2018Business, Business Valuation

Business valuation is an evolving discipline. In some jurisdictions, investment value — rather than fair market value — has emerged as the preferred standard of value in some divorce cases. This trend is important to monitor to ensure your valuation expert estimates the correct standard of value. If not, a court may disregard his or her conclusion.

Investment Value Definition

Fair market value, which is the most common standard of value, estimates the value that the universe of hypothetical buyers and sellers would agree on for an interest in the subject company. It is customarily defined by IRS Revenue Ruling 59-60, but it also may be appropriate for valuations prepared for purposes other than federal taxes.

On the other hand, investment value captures “the value to a particular investor based on individual investment requirements and expectations,” according to the International Glossary of Business Valuation Terms. (This publication is a joint effort of the most prominent business valuation organizations.)

Investment value reflects a particular investor’s subjective goals regarding expected returns, acceptable risk, desired tax attributes, and potential synergies with other businesses. This type of investor could be a potential equity or debt holder — or an existing or prospective operator-owner — traditionally in a merger and acquisition.

Some jurisdictions have begun to use investment value — also known as the “value to the holder” — to determine business value to distribute assets equitably between the parties in a divorce.

INVESTMENT VALUE IN DIVORCE

According to the business valuation textbook, Standards of Value: Theory and Applications:

“Value to the holder considers the business or business interest in the hands of its owner, regardless of whether he or she intends to sell the business. It further assumes that the entitled spouse will continue to enjoy the benefits generated by a business that was created or appreciated during the marriage.”

In a divorce context, the use of investment value — rather than fair market value — it an important distinction to make, because affects a valuator’s assumptions and methodology. For example, when estimating investment value for a divorce, an appraiser might consider the actual tax burden of a pass-through entity, rather than the taxes the company would incur if it operated as a C corporation.

When an appraiser applies the investment value standard, valuation discounts for lack of control and marketability are usually less relevant, especially if one spouse controls the business. That’s because the goal is to measure the full value of the interest to the husband and wife, not the universe of all buyers and sellers who might discount private business interests. As a Virginia court opined in Patel v. Patel (2013 VA App. LEXIS 110):

“Courts valuing marital property for the purpose of making a monetary award must determine…that value which represents the property’s intrinsic worth to the parties.”

Investment value may contradict with how some jurisdictions treat personal goodwill, however. Courts in some states have interpreted the law to mean that investment value eliminates some (or all) personal goodwill from the value of the interest. Others contend that you cannot summarily exclude personal goodwill if the intention is to measure the full value of the interest to the husband and wife. This remains a controversial topic among business valuation professionals.

EVOLUTION OF INVESTMENT VALUE

There is more than one way to define the term “value.” Investment value is an alternative to fair market value. It started as way to help debt and equity investors estimate value in business combinations and strategic decision-making. Now divorce courts are also embracing investment value when splitting up marital assets. But the overriding goal remains the same: To measure the full value to a particular investor, which are the owner-operating or investor in a sale — or the husband and wife in a marital dissolution case.

Blank

Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.

Trending Posts

Subscribe to our Blog

Related Industry Posts

document Organization for Your 401k Plan Audit

document Organization for Your 401k Plan Audit

s discussed in part two of our 401k blog series, one of the purposes of a retirement plan audit is to ensure the plan operates in compliance with both plan documents and IRS and DOL regulations. To do this, your auditor will request access to several documents. Some will be plan-specific documents, while others will be HR and related documents.

read more
2022 Business Valuation Considerations

2022 Business Valuation Considerations

More than two years after COVID-19 changed the world, business valuations are still challenging. At the midpoint of 2022, the idea that things have returned to ‘normal’ is certainly debatable. In many instances, historic valuation inputs, specifically past performance, cannot be taken as an indication of future performance.

read more
2022 IRS Backlogs & Taxpayer Service Updates

2022 IRS Backlogs & Taxpayer Service Updates

The IRS has been busy. In the past two years, the agency has processed trillions of dollars in pandemic relief funds, adjusted to often-changing tax deadlines, and dealt with several complex new tax laws. At the same time, funding was 20 percent lower than in 2010. Understaffed is the understatement of the century.

read more

Subscribe to our blog

SEND US A MESSAGE

We appreciate your interest in Smith Schafer and would love to hear from you.So please complete this form or feel free to email us directly at: [email protected]