Valuing a business is a complicated endeavor. This is true regardless of whether the business has a single owner, or is a large company with thousands of employees. If a business is a significant part of the marital estate, we recommend having the business valued by a professional appraiser. We have worked with many appraisers throughout Montana and can help provide the names of people who can assist you.
This is the first in a series of articles discussing the basics of business valuation in a divorce. The intent of these articles is to provide general information to help you understand what to look for in a business valuation. This article will provide a basic overview of the different business valuation standards. Subsequent posts will discuss different valuation methods and approaches, discount methods, and normalizing adjustments.
What is the standard of value?
The starting place for any business valuation is the valuation standard, also commonly referred to as the standard of value. Different valuation standards exist to account for the different circumstances under which a business may be valued. For example, a different valuation standard may be used depending on whether the business is being sold, kept by the current owner to keep operating, or dissolved completely. While some states define the appropriate valuation in a divorce, most, including Montana, allow the court to choose the valuation standard it believes is appropriate based on the evidence presented. However, we generally see three valuation standards used in our divorce cases in Montana: 1) fair market value, 2) fair value or investment value, and 3) liquidation value.
Fair Value (Investment Value) vs. Fair Market Value vs. Liquidation Value
Fair Market Value
Fair market value is generally defined as the amount at which a property would change hands when there is a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.
For practical purposes, fair value and investment value are considered under same set of circumstance: they are the value to the owner of the business opposed to the value to a prospective buyer. These valuation methods generally do not allow business owners to discount the value of their share due to lack of control or for marketability. Thus, if there are no plans to sell a business it is prudent to consider its value without these discounts applied. Conversely, if there are plans to sell the business, it is prudent to consider the business value with these discounts applied.
Liquidation value is the total worth of the company’s physical assets if it were to go out of business. Liquidation value may be used when the business is going out of business and not being sold to a third party who intends to operate it as a going concern.
NOTE: Nothing in this article is intended to constitute legal advice. Every divorce situation is unique and the information provided here is intended only to be general information. If you would like us to assist you with specific questions regarding your case, please contact our firm.