To FMV or Not FMV?

Last week I attended the AICPA/AAML National Conference on Divorce, a summit of some of the brightest minds in business valuation and divorce. Many of the lectures were good, but the one that most captured my attention was Jay Fishman’s discussion of “standards of value.” He made the best argument I have heard why the divorce courts should not abandon the fair market value standard in favor of fair value.

Jay observed that fair value, which is sometimes defined as fair market value without discounts, is a creature of the judiciary and has different meanings in different jurisdictions and contexts. It arises from dissenting and oppressed shareholder cases, which is one reason why discounts are not applied. In dissenting shareholder cases, for instance, the entire company has been sold, and dissenting shareholders are unhappy with the price or terms. Lack of control and marketability are irrelevant when the entire company has already been sold.

The reason why some professionals advocate a “fair value” standard in divorce is that there is no actual sales transaction in a divorce, and the business owner is not divested of his or her interest in the business as a result of the transaction. Jay pointed out that there is an exchange of value, however, in that the non-owner spouse “pays” for the owner’s interest in the business with other marital or community assets. It is also worth noting that the divorce court has the power, in most jurisdictions, to compel the marital property to be sold for value.

More about the AAML topics – and some new cases – coming soon.