Standard of Value is Everything!

Standard of Value Represents the Key Assumption of the Appraisal

The Standard of Value (archaically called the Definition of Value) assumed by the appraiser is the fundamental assumption under which the valuation proceeds. It represents the most basic instruction from the client to the appraiser, and tailors the valuation analysis to the requirements of the users of the appraisal. There are several typical standards of value commonly used by business appraisers: Fair Market Value, Fair Value, Investment Value, and a few specialized standards of value.

Fair Market Value. This is the typical “willing buyer-willing seller” kind of value, expressed as cash or cash equivalent. It assumes that both the buyer and seller are knowledgeable and are in possession of all pertinent facts, are risk averse and possess competency in the operation of the business. This value represents a composite of all financial buyers, but excludes strategic buyers (buyers who will obtain synergy value by buying the subject property). This standard of value is typical in most kinds of litigation, and illustrates the price at which the business would transact in an open market.

Fair Value. There are many notions of Fair Value, but the most common standard is the same as Fair Market Value but the subject interest is valued as though it were a controlling interest, i.e. without taking a minority discount. This assumption is usually present in statutory appraisals pursuant to shareholder oppression litigation. (i.e. Corp Code §2000.

Investment Value. Investment Value is nothing more than the value of the subject interest to a particular named person or entity, and usually includes the value of the business the buyer will obtain through synergies with his own existing business entities.

Variations on the Theme. There are many variations on the theme, of course. One such variation is the legal requirement that the appraiser not give effect to a buy/sell or partnership agreement where the agreement is construed by law to unfairly penalize the non-owner spouse in the division of community property. Partners might, for example, draft a partnership agreement that makes the partnership interest valueless for purposes of distribution of community property, but the law in that jurisdiction might require that the appraiser to not give voice to that provision and appraise the partnership interest as though the agreement did not exist.