State laws concerning family law generally define the standard of value for valuing marital property (the company or ownership interest) in a marital dissolution or divorce. The family law courts have generally used either the fair market value (FMV) or fair value as the standard of value, each with their own (and sometimes contradictory) definitions, for valuing marital property. The family law courts in California have used the FMV and fair value standards. The FMV standard uses the hypothetical financial buyer and is generally used in estate and gift tax matters; whereas, the fair value standard uses the specific investment buyer (or the investment value standard).
- Statutory definition: Civil Code Section 4800, subdivision (a) of the Family Law Act is satisfied when the investment value of closely held shares is determined rather than their market value.
- Judicial or legal definition: The three basic approaches, or their variations, which have been recognized in determining the investment value of closely held shares are commonly termed (1) capitalization of earnings (2) dividend paying capacity (3) book value or net asset value.
The legal value does not depend on whether the marital property can sell or for how much similar companies are selling. The legal value of the marital property without an agreement is the judicial officer’s decision based on the expert opinion of valuation analysts and accountants.
The California family law courts have generally assumed that the in-spouse or owner of the business does not anticipate a sale (the sale is not imminent). California and case law have disallowed discounts for lack of control and marketability resulting in marital property values higher than fair market value, which may become a factor of contention between the parties. California does not include any personal goodwill in the value of the business because it is personal and not marital property.
An in-spouse’s desire to gain complete control over the company means that he could be expected to pay more than its FMV. The courts have accepted the opinion that when a 50% owner has the ability to block the buyout, the other 50% owner could be reasonably expected to pay a blockage premium or a price significantly above the minority value in order to gain complete control of the business.
Reasons for the FMV standard:
- It is unfair to value the marital property (the company or ownership interest) received by one spouse higher than that spouse could realize on a sale.
- Funding the “buy-out” may be a financial hardship especially when the spouse paying for the marital property interest is also paying support.
Reasons against the FMV standard:
- There is no contemplated sale.
- There is no market or hypothetical buyer.
- The real value to the marital estate is to the present owner.
Other than in divorce, valuations by business valuation analyst are important in financial, tax and litigation matters.
The preceding article is intended as general information and should not be considered legal, tax, accounting or other expert advice. As the author, I represent that neither the information nor its impact is comprehensive. If legal, tax, accounting or other expert advice is required, please use a qualified and competent professional.