Understanding the Accepted Standards of Value in Divorce Cases

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Investment value, fair market value, and fair value are the commonly accepted standards of value in divorce cases. Divorce can become more complicated when a business is involved. A standard of value is a set of conditions under which a closely held business will be valued.

Fair Market Value

Fair market value is the price at which an asset would change hands between reasonably knowledgeable buyers and sellers. Its goal is to reflect the rights and benefits of a spouse as well as the detrimental effects of limitations. As a result, discounts are typically applied to establish the value of minority interests.

Fair Value

Fair value is similar to fair market value, but it does not involve the application of valuation discounts. It is based on the premise that the divorce creates a forced or oppressed circumstance for one of the divorcing spouses, usually the one that does not participate directly in business operations. The forced party is considered to be entitled to the subject ownership interest’s fair value. The divorce court with jurisdiction over a particular case dictates the fair value.

Investment Value

Investment value is a commonly applied standard of value in Nevada. In a marital dissolution case, investment value is the value of an asset to a person based on his or her expectations and requirements. Some factors that investment value is considered to reflect include:

  • The investor’s expectation of risk
  • Earning expectations resulting from the ownership
  • Desired tax attributes
  • Potential synergy with other businesses
  • Relationship of the spouse with the other owners of the business

Under the investment value standard, an asset is valued based on its economic value to the owner, irrespective of whether the asset can or will be sold. Therefore, a business or business interest can be valued whether the owner intends to sell it or not. Similarly, a practice that cannot be sold can be valued based on the income it generates to the practitioner owner.

The standard assumes that the owner will continue to enjoy the benefits generated by an asset that was created or increased in value during the marriage.

The value estimate of a business can vary greatly depending on the standard of value applied. Valuation experts usually refer to a jurisdiction’s statutes and case laws to establish the applicable value standard. Knowing the key issues in divorce cases and knowledgeable guidance can help business owners reach amicable agreements in divorce.

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