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For What It’s Worth: Value to Whom? – September 2014

“For What It’s Worth” is a monthly newsletter written by Director Rand Curtiss.

This month’s letter addresses a vital but often hidden assumption underlying every business appraisal, or for that matter, anyone’s opinion about the value of anything.

The hidden assumption, or premise, is whether value reflects:

  • Value in exchange: the economic benefit gained from buying or selling it; or
  • Value to the holder: the economic benefit gained from continuing to own it.

Value in exchange assumes that there will be an actual transaction (an exchange). Under the tax-related fair market value standard, it involves any willing buyer and seller, without regard to their unique circumstances. In actual deals, such as a merger or capital raise, value negotiations will of course be based on the unique characteristics of individual buyers and sellers (such as synergies and negotiating advantages or disadvantages), leading to the investment standard of value. In dissenting shareholder matters, state-mandated fair value standards are usually similar to fair market value. In financial reporting valuations, FASB-mandated fair value standards are a mix of investment and fair market value, because they assume the buyers of the assets are “likely market participants.”  Value in exchange thus governs four of the five major applications of business appraisal: taxation, transaction, dissenting shareholder, and financial reporting matters. It also applies to many appraisals in the fifth major application: litigation.

There is, however, a major exception to that last statement, and it occurs in divorce proceedings. Matrimonial courts are courts of equity in which triers of fact generally have latitude in interpreting relevant statutes in order to achieve fair outcomes.  There are significant differences between individual states and jurisdictions as to how this is accomplished.  In many, there are also inconsistencies with regard to case precedent.  A further complication is that few divorces lead to forced sales of businesses. Since the propertied spouse will continue to own the business, value to the holder becomes a defensible premise.  This leads to controversies about the value of personal and professional goodwill, as well as the applicability of adjustments for control and liquidity characteristics. As a result, great care must be taken in divorce proceedings to explore the ramifications of the value in use versus value in exchange issue.

Valuations play a part in all tax, transaction, and litigation matters.  For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations.  For more information, visit or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please or call (216) 589-0900.

Representative clients

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