Standards of Values
Definition and Discussion of the Standard of Value
A standard of value is the definition of the type of value being sought in a particular valuation assignment. Typical examples of standards of value are:
Fair market value - The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have a reasonable knowledge of the relevant facts. (American Society of Appraisers Business Valuation Standard I, 1992).
Investment value - Value to a particular investor based on individual investment requirements, as distinguished from the concept of market value, which is impersonal and detached. Investment value is the specific value of goods or services to a particular investor for individual investment reasons. (See Pratt, Valuing Small Businesses and Professional Practices, Third Edition).
Fair value - “The fair value shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of the sale of the entire business as a going concern in a liquidation.” (CCC Section 2000)
The Unique Standard of Value in California Family Law
The family law statutory standard of value appears to blend these well-defined established standards. Based on our practice experience and research, there is no universal standard of value among states and, in California, not necessarily a single standard of value for all cases. While California case law suggests that fair market value is the standard of value, there are many situations where this standard of value is not necessarily used. As examples, the required valuation of licenses and professional practices cannot be based on the fair market value standard because these assets cannot be sold in any marketplace. Further family owned “small businesses” may or may not be saleable in the marketplace and no provision for marketability or minority interest (if any) is always provided. Accordingly, it
is our opinion and belief that, based on case law as of the date of this report, the appropriate California family law standard of value is intrinsic investment value defined as follows:
Intrinsic investment value - The value to the community estate based on individual investor requirements operated as a going concern without minority interest (if applicable) discount. Value is independent of current market price and is largely based on an assessment of risk and related investment return made by an informed non-strategic investor.
California courts tend to ignore the value set in a company’s buy/sell agreement, even when that agreement may limit the fair market value of the equity interest to the agreement’s stated value. Certainly, the intrinsic investment value of the equity interest may exceed the buy-sell, and for that matter, the fair market value of the security.