BUSINESS VLUATIONS MMS (28 QUESTIONS)

Question 1

What standard of valuation is used by the IRS?

Answer 1

Fair Market Value is used by the IRS and in MOST types of litigation.

Question 2

What are the commonly accepted standards of value?

Answer 2

1. Fair market value
2. Fair value
3. Investment value
4. Intrinsic value
5. Divorce value

Question 3

Define fair market value.

Answer 3

Fair market value is typically defined as ―the price, expressed in terms of cash equivalence, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm‘s length in an open and un restricted market where neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts

Question 4

Define fair value.

Answer 4

Fair value has often been used in dissenting minority interest shareholder suits, which has been either statutorily or judicially defined.

Question 5

Define investment value.

Answer 5

Investment value is typically the value to a specific buyer requiring consideration of buyer specific attributes of the buyer, such as the buyer‘s cost of capital as opposed to the market cost of capital. This value to a specific buyer is opposite to that of the hypothetical buyer assumed in the fair market standard of value.

Question 6

Define intrinsic value.

Answer 6

Intrinsic value is also referred to as ―holder value‖ and is sometimes also referred to as investment value to the owner of the business. The intrinsic value typically recognizes the
fact that the business owner going through a divorce will not be selling the business, and there is no hypothetical transaction as there is in the fair market value appraisal, and the owner will continue to receive the value of the business into the future

Question 7

What is divorce value?

Answer 7

It varies from state to state.

Question 8

What is the problem with looking to state statutes to define “value” for a business state by state?

Answer 8

Most states reference “value” without any guidance as to the characteristic of the standard of value.

Question 9

How does Florida treat fair market value?

Answer 9

In Florida, fair market value is employed as an APPROACH for valuing professional good will NOT AS A STANDARD OF VALUE

Question 10

Do PA statutes define which standard of value it should use in divorces?

Answer 10

Pennsylvania does not indicate the ―standard of value‖ to be employed

Question 11

Do NY statutes define value?

Answer 11

NO

Question 12

Since PA’s divorce code doesn’t define the standard of value to use, how is it defined by case law?

Answer 12

Pennsylvania cases interpret the governing statutes to require ―net realizable value.

Question 13

What appears to be the principle of valuation or the standard of value, in PA?

Answer 13

Realizable value

Question 14

What is “realizable value” as defined by PA case law?

Answer 14

The valuation task in Pennsylvania is to analyze the factors specific to the subject business or practice interest, including ownership agreements, and determine what value would be realizable in a transaction of the subject interest.

Question 15

How have NC courts defined value?

Answer 15

In North Carolina, the courts have defined the statutorily mandated ―net value‖ as being ―market value, if any, less the amount of any encumbrance serving to offset or reduce market value

Question 16

What have NC appellate courts routinely stated as it relates to the division of marital property in divorces?

Answer 16

North Carolina appellate courts have routinely stated that when making an equitable distribution of marital and divisible property, the court must ―determine the net value of the marital property . . . with net value being market value, if any, less the amount of any encumbrances.

Question 17

What is the criticism with using a fair market value standard to value professional practices or closely held businesses?

Answer 17

Some would argue that a fair market value standard ignores the contribution of the non-professional spouse in the development of the practice or business and creates a windfall for the professional spouse.

Others would argue that utilizing a different standard, i.e., an ―intrinsic value or as it is called in some jurisdictions ―holder‘s value, is highly speculative, results in excessive values, and forces the professional spouse to pay for gain that he or she may never realize.

The question also arises as to whether the fair market value standard can or should be applied in the face of a partnership agreement or shareholders agreement.

Question 18

What is the one most widely used standard of value?

Answer 18

Fair market standard of value is the most widely used but is has been applied inconsistently by courts in various jurisdictions in the value of goodwill of professional practices and businesses in divorce cases.

Question 19

What is the objective of the fair market value according to some experts?

Answer 19

The objective of the fair market value standard is to determine a likely value for a business or interest in a business at which it might be sold. This is why there is such wide criticism with fair market value.

Because in the case of a non-marketable interest in a business, the value is purely hypothetical. It cannot be proven because it is an opinion of the analyst determining the fair market value. What it clearly is NOT is a transactional value. What a business or business interest is actually sold at is not its fair market value but rather its transactional value.

Question 20

Why do so many commentators take issue with the fair market value standard?

Answer 20

Much of the criticism arises from the application of a fair market value standard to goodwill relates to whether or not the asset can be sold. If it cannot be sold then the value is purely hypothetical.

Question 21

Is professional goodwill a marital asset in every jurisdiction?

Answer 21

No - whether professional goodwill is even considered a marital asset to be divided depends on the jurisdiction.

Question 22

What are the three basic views regarding professional goodwill?

Answer 22

1. professional goodwill is NEVER a divisible marital asset (UTAH)
2. professional goodwill is marital an to be valued regardless of whether it is practice or personal (NJ & NC)
3. differentiation between practice and entity goodwill and personal good will (Texas, Maryland, FLORIDA, Wisconsin, Illinois, Pennsylvania, Mississippi, Indiana).

Question 23

What is the basic premise of personal goodwill?

Answer 23

The basic idea underlying personal goodwill is that an entity has higher profits and therefore higher value as a result of an individual employee‘s unique abilities and characteristics

Question 24

What is the basic premise of entity goodwill?

Answer 24

Entity goodwill is that goodwill which attaches to the practice and is not associated with the individual employee‘s unique abilities and characteristics

Question 25

What is the dilemma in jurisdiction that include both personal and entity goodwill as as marital or community property?

Answer 25

A dilemma arises when applying the fair market standard to personal goodwill. Some experts say that under no circumstances can a fair market value standard be applied to personal goodwill bc a hypothetical knowledgeable buyer will not pay cash for personal goodwill. The assumption is that if the professional leaves the practice, the client will go with him or her.

Question 26

What will experts say if an intrinsic value standard is used to apply to professional goodwill instead of a fair market value standard

Answer 26

A higher value will always be obtained because the value will include both personal and entity goodwill

Question 27

What can be inferred once an evaluator starts looking at a particular practitioner's age, health, judgment or skills?

Answer 27

You can infer that the evaluator is looking at intrinsic value, not fair market value. (Some experts disagree i.e. Trugman)

Question 28

What is another way to refer to intrinsic value?

Answer 28

Holder value

Question 29

What are factors that demonstrate personal goodwill?

Answer 29

1. The age and health of the professional 2. The professional‘s demonstrated earning power 3.The professional‘s reputation in the community for judgment, skill, and knowledge 4. The professional‘s comparative professional success 5. The nature and duration of the professional practice, whether as a sole practitioner or a contributing member of a partnership or professional corporation

Question 30

What standard of value does Texas use?

Answer 30

Fair market value

Question 31

Does Texas include personal goodwill as marital?

Answer 31

No -

Question 32

What are some factors to identify entity goodwill?

Answer 32

1. What would be an appropriate compensation package for the replacement for the professional spouse? 2. Which customers or patients would be likely to follow the departing professional (i.e., over which accounts the professional has a controlling relationship)? 3. Looking at competitors, would the pricing strategy need to change upon the departure of the professional spouse? 4. How would departure of the professional spouse affect operating efficiency; does the professional spouse have unique management abilities (or weaknesses) to minimize operating costs? 5. What are the qualifications of the remaining personnel? 6. Is there tangible evidence of entity goodwill (cumulative advertising, years of ongoing business and reputation, databases, intellectual property, trade secrets)? 7. How would the departure of the professional spouse change the operating risk of the business or practice? 8. Are there any employment agreements or other contracts between the business and professional that would prevent him from competing with the business for a period of time?

Question 33

The identification and valuation of marital assets fall under what two basic premises?

Answer 33

Value in exchange and value to the holder

Question 34

How do states following the value in exchange premise view identification and valuation of marital assets?

Answer 34

In the context of a sale

Question 35

What does value in exchange presume?

Answer 35

Value in exchange presumes some sort of hypothetical transaction where the business or business interest is exchanged for cash or cash equivalent.

Question 36

What does states following a value in exchange method reject?

Answer 36

States following a value in exchange premise reject the inclusion of intangible value reliant on an individual for several reasons, including the viewpoint that post--marital efforts are necessary to realize the value, and also that the "property" allegedly created is not capable of being separated from the person

Question 37

What does value to the holder consider?

Answer 37

Value to the holder considers the value of a business or business interest in the hands of its owner, regardless of whether he or she intends to sell the business. It further assumes that the titled spouse will continue to enjoy the benefits generated by a business that was created or appreciated during the marriage, and contemplating a value upon sale would dilute the actual value that both spouses enjoyed during the marriage, as only the titled spouse would continue to benefit from that value after the marriage ends.