Standard of Value for Business Appraisals in Colorado Dissolution of Marriage Proceedings
| Publication year | 2022 |
| Pages | 24 |
FAMILY LAW
BY RONALD L. SEIGNEUR.
This article addresses the application of different standards of value for business appraisals in Colorado dissolution of marriage proceedings and discusses how the standards affect the concluded value of a closely held business or professional practice ownership interest.
There is relative consensus in the legal and financial expert communities that the selection of the applicable standard of value in a business or professional practice appraisal in a Colorado dissolution of marriage proceeding is a legal issue to be determined by the trial court. Unfortunately, there is also a relative consensus in the Colorado family law community that there is not a clear, established standard of value that applies to a Colorado dissolution of marriage case. The burden this uncertainty levies on the trier of fact to weigh conflicting legal precedents creates inefficiencies and extra costs in many dissolution proceedings involving formal business appraisals. This article explores the issue of selecting a standard of value in dissolution of marriage proceedings and provides insight into how the different standards affect valuations in business and intellectual property appraisal matters.
Overview of the Standard of Value
Before a business appraisal can be completed, a standard of value must be established. The business community has several well-established definitions of various standards of value to fit different circumstances. Various credentialing organizations recently compiled an update to the International Glossary of Business Valuation Terms {Glossary),[1]a resource widely accepted among financial experts. The updated Glossary includes the following definitions:[2]
■ Fair market value represents the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, each acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of relevant facts.
■ Fair value[3] consists of different definitions, depending on the context and purpose. Fair value is typically defined or imposed by a third party (e.g., by law, regulation, or contract, or for financial reporting/ attestation standard-setting bodies).[4]
■ Investment value represents the value of an asset or business to a particular owner or prospective owner for individual investment or operational objectives. This is also known as value to the owner. Notably, atleast among the business appraisal community, value to the owner is referenced as a subset to the more universally accepted investment value standard and is not otherwise defined as a separate identifiable standard of value. Investment value considers the value to an identified owner and/or buyer of a business interest, while fair market value assumes an unidentified hypothetical willing buyer and/ or seller with no relationship to the subject business or professional practice. Each standard can produce vastly different results.
When a propertied spouse in a dissolution proceeding[5] is an identified seller, the standard immediately shifts from a fair market value to an investment value, and it becomes critical to consider the motivations and circumstances of that identified individual, no different than when there is an identified buyer of the interest that has unique motivations and economic attributes. The Glossary's, definition of fair market value is like that set forth in IRS Revenue Ruling 59 -60,[6] which defines fair market value as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Issued in 1959, Revenue Ruling 59-60 has become a guideline for other valuation purposes and has been accepted by the valuation community as a key analytical framework for valuing closely held businesses.
Additionally, court decisions frequently state that die hypodietical willing buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about die property and the market for such property.[7]
Seller and Buyer Characteristics
The definitions of fair market value from the Glossary and Revenue Ruling 59-60 assume the following:
■ The buyer and seller are hypothetical parties and not specific buyers or sellers.
■ The hypothetical buyer and seller are prudent and act in their own best interests.
■ The hypothetical buyer is without the synergistic benefits that may be available to the identified owner of the subject interest
■ The business will be exposed for sale on the open market for a reasonable period of time.
■ The consideration paid for the property is in cash or its equivalent.
■ The business will continue as a going concern and not be liquidated unless evidence to the contrary suggests that the highest and best use of the property is liquidation.
The hypothetical buyer under the fair market value standard is a...
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