Business Valuation for Divorce (1992)

Divorce value differs from fair market value because divorce laws vary among the states. As a result, appraisal methods in divorce valuations must consider the unique purpose. Many CPAs recently have discovered a new niche: divorce practice and litigation services. These engagements are a logical extension of CPAs' ability to analyze financial information and provide consulting services. Forensic accounting is a rapidly growing service area at many CPA firms because of the need for competent financial analysis in litigation cases, particularly divorce cases. Business valuation is only one of several roles for the CPA in divorce practice, but it is probably the most challenging and rewarding. Done correctly and competently, it requires a combination of judgment, analytical skill and hard work, culminating in an opinion of value that is both reasonable and rational under the circumstances. This article explores one aspect of business valuation work, the divorce value, and how it differs from the traditional fair market standard of value. VALUE DEPENDS ON THE APPRAISAL'S PURPOSE The historic test of value, the willing-buyer or fair market value standard, is the price at which property would change hands between a willing buyer and seller. This standard has been restated many times by the Tax Court and other federal and state courts. Its definition under Treasury regulations has become generally accepted for many purposes, ranging from pricing retail goods to litigation involving loss of property use to divorce cases that must take business interests into account. A business, however, can have more than one value at any time. The appropriate value for any given valuation reflects the appraisal's purpose and the interests of those involved. A valuation for divorce purposes is measured against a class of buyer in the same status as the present owner - not a hypothetical investor. By contrast, a valuation for estate tax purposes must take into consideration diminished earning capacity due to the loss of a key person and is measured against a hypothetical control investor. A gift tax value is measured in terms of its value to the donor under Internal Revenue Service private ruling 8907002. WHY THE DIVORCE VALUATION IS DIFFERENT The following characteristics identify substantive differences between a divorce valuation and one with a willing buyer. 1. State law defines marital property subject to valuation and distribution, whether or not the same property could be sold to a willing buyer at any price. 2. The business is not being sold and the only willing buyer is the current owner. Thus, the appraisal's objective is to determine the value to the current owner in the marital community. 3. The basis of value is determine differently for a sale, and risks associated with a management change are not relevant. Also of interest to the willing buyer but not to the divorce court is the business's value when combined with the buyer's existing enterprise for economies of scale or special benefits from items such as patents, copyrights or management personnel. Further, the divorce court is concerned with the business's value in the present owner's hands as a marital asset subject to equitable distribution statutes and monetary awards. Equity between the parties does not generally influence the willing buyer's valuation perspective. 4. Not all business assets are valued for a sale, but all may be marital property. In setting a price for the sale of a closely held business, an owner ordinarily excludes certain assets from the valuation. For example, cash and cash equivalents, such as marketable securities owned by the business, generally are not sold. Neither are nonoperating assets, such as investments in partnerships, art objects and raw land. These assets and related liabilities usually are retained by the owner and, hence, excluded from a willing-buyer valuation. …