Page 44 - Family Law Services

gift(s). Nevertheless, the CPA should discuss the matter with the attorney with whom he or she is work-
ing to make sure the CPA’s valuation date(s) is appropriate for the particular case.

The Standard of Value

It is important to know the appropriate standard of value. The standard of value varies depending on the
jurisdiction where the divorcing parties live. Most state statutes do not precisely define the standard of
value. Some variations in the standards of value used in differing jurisdictions may arise from the
court’s attempt to be "fair or equitable." Understanding the current interpretations of case law in the
CPA’s jurisdiction is important. Some of the standards of value used by the courts are as follows:

• Fair market value

• Intrinsic (fundamental) value

• Investment value

• Fair value

Fair Market Value

Fair market value (FMV) is, by far, the most commonly used standard of value in the business valuation
arena. However, the standard and application of FMV varies by jurisdiction. Frequently, this standard
assumes a hypothetical arm’s-length sale without regard to a specific buyer or seller. fn 1 Despite refer-
ring to the value as FMV, some jurisdictions exclude portions of the business enterprise, such as person-
al goodwill, from marital property. Further, in assuming a hypothetical transaction, the valuation of a
minority interest should generally be discounted for factors such as the subject equity’s lack of control
and marketability. However, some jurisdictions do not allow for discounts or the consideration of de-
ferred taxes. Some jurisdictions assume a covenant not to compete in the valuation, which may or may
not be divisible.

Intrinsic Value

Intrinsic value is the value that an investor considers to be the true or real value of a business that will
become the market value when other investors reach the same conclusion. In divorce, the intrinsic value
in some jurisdictions is known as the investment value to the owner.

Intrinsic value recognizes that the business owner going through a divorce will not be selling the busi-
ness, and, therefore, there will be no hypothetical transaction, as in an FMV appraisal. Instead, the own-
er will continue to receive the benefits of ownership into the future. In this instance, the business may be
worth more or less to the owner than if it were transferred into the hands of a hypothetical purchaser.
This can also be construed as the value the owner would lose if he or she were to be deprived of the
business interest. In some jurisdictions, discounts for lack of control and marketability are not allowed
under the intrinsic value standard.

fn 1 Readers should be familiar with IRS Revenue Ruling 59-60.

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