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Standards of Value Used in Colorado Divorce Cases
(provided by David Melton & Associates)
Typically, the standard of value used to value a business for divorce purposes is either: Fair Market Value, which is based on the value in a hypothetical purchase or sale transaction. Intrinsic (Investment) Value, which determines the value of the business based on its worth to a specific owner.
The standards used vary from state to state. The guidance provided by state statutes and case law range from being helpful to raising more questions than they answer.
Colorado statutes 14-10-113, on disposition of property, do not define a standard of value to be used in valuing a closely held business. Two court of appeals cases do give guidance in valuing goodwill in a closely held business.
In re the Marriage of Martin, 1985, the court tells us, "the value of goodwill is not necessarily dependent upon what a willing buyer would pay for such goodwill: rather, the important consideration is whether the business has a value to the spouse over and above the tangible assets".
In re the Marriage of Graff, 1994, the court reaffirms Martin as it relates to the value of goodwill as "not necessarily dependent" upon what a willing buyer would pay for such goodwill but what the goodwill is worth to the spouse.
What Does All This Mean?
In my layman's opinion, the appeals courts language "not necessarily dependent upon" means the trial court can choose to adopt either the fair market value standard or the investment value standard for valuing goodwill.
Unanswered Questions?
How will the courts rule on other potential valuation theory differences between the two standards of value, including capitalization rates, minority discounts, and marketability discounts?
How can the valuation expert know and quantify how the value to a specific spouse differs from the value to a hypothetical buyer?
Information Provided By:
David Melton & Associates located at
http://www.assettracing.com
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