Do you recall a time when you were traveling between different states and noticed the interstate speed limits were different, sometimes 65 MPH and other times 70 MPH depending on what state you were in? It is safe to say that different states (jurisdictions) have different laws regarding the speed limits. It is the responsibility of the driver to educate themselves on those laws and drive accordingly. If they fail to do so, they face the risk of a speeding ticket and a fine. The same process relates to differences in the applicable Standard of Value accepted by each state for business valuations completed in divorce proceedings. Is it Fair Value, Fair Market Value, Investment Value? It is the responsibility of the parties, their attorneys, and the business valuator to understand the appropriate Standard of Value for the state of jurisdiction.
What is a Standard of Value?
Standards of value determine whether the interest is valued as if it were sold, held by a certain person, or bargained for between a willing buyer and willing seller.
• Fair Market Value – price at which the property would change hands between a willing buyer and willing seller, neither under a compulsion to act, and both parties having a reasonable knowledge of relevant facts.
• Fair Value – price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; Willing buyer, however, may or may not be a willing seller.
• Investment Value – value to a specific investor based on specific investment requirements.
• Intrinsic Value – value a particular investor believes is true or real; this value may be above or below fair market value.
What’s at Risk?
The application or interpretation of the standard of value relating to business valuations can be subjective and has been a matter of debate among valuation professionals and the courts. However, courts across the country have taken stances on what standards of value they will accept in divorce proceedings. Failing to use the appropriate standard of value can have a devastating effect on the value opinion concluded by the business valuation professional. Some courts have resorted to throwing out the valuation experts report and barring them from testifying as an expert witness for a deviation in the use of a standard of value.
Don’t settle for less and be on the side who loses their expert’s report because of the use of the wrong standard of value for the court of jurisdiction. Having professionals on your side that know to work with legal counsel and ask the right questions when it comes to determining the appropriate Standard of Value for your matter is key. Our litigation support experts, CPAs licensed in Iowa and Illinois and Accredited in Business Valuation (ABV), provide consulting services to plaintiffs and defendants and their attorneys, trustees of trusts, executors of estates, spouses in divorce, that have been victim of embezzlement and/or fraud, business owners in disputes, and business valuation services. Whether we’re engaged prior to filing or after filing, we partner with attorneys to uncover, analyze, and explain in an understandable format the financial landscape of the case. TD&T, a full-service CPA firm, can assist you with those challenges related to Business Valuation, expert testimony, forensic financial analysis, expert report rebuttals and also provide services related to your accounting and tax needs.