In some jurisdictions, investment value — rather than fair market value — has emerged as the preferred standard of value in some divorce cases. This trend is important to monitor to ensure your valuation expert estimates the correct standard of value. If not, a court may disregard his or her conclusion.
Investment Value Definition
Fair market value, which is the most common standard of value, estimates the value that the universe of hypothetical buyers and sellers would agree on for an interest in the subject company. It is customarily defined by IRS Revenue Ruling 59-60, but it also may be appropriate for valuations prepared for purposes other than federal taxes.
On the other hand, investment value captures “the value of an asset to a particular owner or prospective owner for individual investment or operational objectives,” according to the International Valuation Glossary — Business Valuation. (This publication is a joint effort of several prominent business valuation organizations.)
Investment value reflects a particular investor’s subjective goals regarding expected returns, acceptable risk, desired tax attributes, and potential synergies with other businesses. This type of investor could be a potential equity or debt holder — or an existing or prospective operator-owner — traditionally in a merger and acquisition or strategic decision-marking context.
Some jurisdictions have begun to use investment value — also known as the “value to the holder” — to determine business value to distribute assets equitably between the parties in a divorce.
Investment Value in Divorce
According to the business valuation textbook, Standards of Value: Theory and Applications:
In a divorce context, the use of investment value — rather than fair market value — is an important distinction to make, because affects a valuator’s assumptions and methodology. For example, when estimating investment value for a divorce, an appraiser might consider the actual tax burden of a pass-through entity, rather than the taxes the company would incur if it operated as a C corporation.
When an appraiser applies the investment value standard, discounts for lack of control and marketability are usually less relevant, especially if one spouse controls the business. That’s because the goal is to measure the full value of the interest to the husband and wife, not the universe of all buyers and sellers who might discount private business interests.
Investment value may contradict with how some jurisdictions treat personal goodwill, however. Courts in some states have interpreted the law to mean that investment value eliminates some (or all) personal goodwill from the value of the interest. Others contend that you cannot summarily exclude personal goodwill if the intention is to measure the full value of the interest to the husband and wife. This remains a controversial topic among business valuation professionals.
Evolution of Investment Value
There’s more than one way to define the term “value.” Investment value is an alternative to fair market value. It started as way to help debt and equity investors estimate value in business combinations and strategic decision-making. Now divorce courts are also embracing investment value when splitting up marital assets. But the overriding goal remains the same: To measure the full value to a particular investor, which are the owner-operating or investor in a sale — or the husband and wife in a marital dissolution case.