BUSINESS VLUATIONS MMS (28 QUESTIONS) Flashcards
What standard of valuation is used by the IRS?
Fair Market Value is used by the IRS and in MOST types of litigation.
What are the commonly accepted standards of value?
- Fair market value
- Fair value
- Investment value
- Intrinsic value
- Divorce value
Define fair market value.
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
Define fair value.
Fair value has often been used in dissenting minority interest shareholder suits, which has been either statutorily or judicially defined.
Define investment value.
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.
Define intrinsic value.
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
What is divorce value?
It varies from state to state.
What is the problem with looking to state statutes to define “value” for a business state by state?
Most states reference “value” without any guidance as to the characteristic of the standard of value.
How does Florida treat fair market value?
In Florida, fair market value is employed as an APPROACH for valuing professional good will NOT AS A STANDARD OF VALUE
Do PA statutes define which standard of value it should use in divorces?
Pennsylvania does not indicate the ―standard of value‖ to be employed
Do NY statutes define value?
NO
Since PA’s divorce code doesn’t define the standard of value to use, how is it defined by case law?
Pennsylvania cases interpret the governing statutes to require ―net realizable value.
What appears to be the principle of valuation or the standard of value, in PA?
Realizable value
What is “realizable value” as defined by PA case law?
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.
How have NC courts defined value?
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
What have NC appellate courts routinely stated as it relates to the division of marital property in divorces?
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.
What is the criticism with using a fair market value standard to value professional practices or closely held businesses?
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.
What is the one most widely used standard of value?
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.
What is the objective of the fair market value according to some experts?
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.
Why do so many commentators take issue with the fair market value standard?
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.
Is professional goodwill a marital asset in every jurisdiction?
No - whether professional goodwill is even considered a marital asset to be divided depends on the jurisdiction.
What are the three basic views regarding professional goodwill?
- professional goodwill is NEVER a divisible marital asset (UTAH)
- professional goodwill is marital an to be valued regardless of whether it is practice or personal (NJ & NC)
- differentiation between practice and entity goodwill and personal good will (Texas, Maryland, FLORIDA, Wisconsin, Illinois, Pennsylvania, Mississippi, Indiana).
What is the basic premise of personal goodwill?
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
What is the basic premise of entity goodwill?
Entity goodwill is that goodwill which attaches to the practice and is not associated with the individual employee‘s unique abilities and characteristics
What is the dilemma in jurisdiction that include both personal and entity goodwill as as marital or community property?
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.
What will experts say if an intrinsic value standard is used to apply to professional goodwill instead of a fair market value standard
A higher value will always be obtained because the value will include both personal and entity goodwill
What can be inferred once an evaluator starts looking at a particular practitioner’s age, health, judgment or skills?
You can infer that the evaluator is looking at intrinsic value, not fair market value. (Some experts disagree i.e. Trugman)
What is another way to refer to intrinsic value?
Holder value
What are factors that demonstrate personal goodwill?
- The age and health of the professional
- The professional‘s demonstrated earning power
3.The professional‘s reputation in the community for judgment, skill, and knowledge
- The professional‘s comparative professional success
- The nature and duration of the professional practice, whether as a sole practitioner or a contributing member of a partnership or professional corporation
What standard of value does Texas use?
Fair market value
Does Texas include personal goodwill as marital?
No -
What are some factors to identify entity goodwill?
- What would be an appropriate compensation package for the replacement for the professional spouse?
- Which customers or patients would be likely to follow the departing professional (i.e., over which accounts the professional has a controlling relationship)?
- Looking at competitors, would the pricing strategy need to change upon the departure of the professional spouse?
- How would departure of the professional spouse affect operating efficiency; does the professional spouse have unique management abilities (or weaknesses) to minimize operating costs?
- What are the qualifications of the remaining personnel?
- Is there tangible evidence of entity goodwill (cumulative advertising, years of ongoing business and reputation, databases, intellectual property, trade secrets)?
- How would the departure of the professional spouse change the operating risk of the business or practice?
- 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?
The identification and valuation of marital assets fall under what two basic premises?
Value in exchange
and value to the holder
How do states following the value in exchange premise view identification and valuation of marital assets?
In the context of a sale
What does value in exchange presume?
Value in exchange presumes some sort
of hypothetical transaction where the business or business interest is exchanged
for cash or cash equivalent.
What does states following a value in exchange method reject?
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
What does value to the holder consider?
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.
