Standard of Value
In divorce cases, it is critical that the divorcing parties and their attorneys understand the applicable Standard of Value and handling of Personal Goodwill in their State. Our business valuation partner, Lou Pereira of MBA, is always aware of the latest changes or rulings. The standard of value defines the value to whom and under what assumptions. This includes both real and hypothetical circumstances. All value is a function of the present worth of the future benefits the ownership interest is expected to generate for the holder of that interest.
Fair Market Value vs. Investment Value
In divorce cases, the standard of value determines whether the interest is valued as if it is to be sold (Fair Market Value) or valued as if it is held by a specific individual (Investment Value).
Fair Market Value assumes the interest is exchanged in an open market. It typically includes adjustments for lack of marketability and control.
Fair Value is applied in some divorce cases as Fair Market Value without adjustments for lack of control.
Investment Value is the value to a specific individual. This can be applied as if in exchange (sale) or to the current owner. In some divorce cases it is applied as the value to the holder.
Some states apply hybrid standards that may be a mix of Fair Market Value, Fair Value, and Investment Value.
The International Glossary of Business Valuation Terms defines goodwill as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.” This goodwill can attach to the enterprise or to the working owner depending on the facts and circumstances regarding the relationships with the customers and other outside stakeholders.
In 32 states, personal goodwill is not considered a marital asset. In three of these states, no goodwill, including enterprise and personal goodwill are considered marital assets. In Massachusetts, Connecticut, Vermont, Rhode Island, Maine and New Hampshire, Personal Goodwill is not considered a marital asset. Standard of Value in Divorce is Fair Market Value for all the New England states except Massachusetts, which uses Fair Value.