Unfortunately, in most states, the standard of value for marital dissolution purposes is not clearly spelled out, leaving much room for interpretation.
By Shannon Pratt and Alina Niculita, Valuators
The purpose of this article is to focus the courts’ and the lawyers’ attention on the fact that there can be many definitions (and interpretations of definitions) of value. We also discuss the most common standards of value and some of their implications and interpretations. Unfortunately, in most states, the definition of value for marital dissolution purposes is not clearly spelled out, leaving much room for interpretation. The lack of clear definitions and interpretations challenges appraisers and lawyers to work together to assist the courts in creating some sound precedential case law that will clear up much of the existing confusion.
Fair Standard of Value for Marital Dissolution
Family law courts sometimes use a fair value standard of value that can be inferred from the language and rulings in the case. When this standard is used, it usually is not intended to be synonymous with “fair value” as used in dissenting stockholder actions, although some marital dissolution decisions have expressly referred to the fair value standard used in shareholder oppression and appraisal actions. Rather, it usually means something akin to fair market value with some (usually not-well-defined) modification(s). Some traits characteristic of fair value cases are that distributions are made on a pro-rata share of enterprise value with no discounts; there are no “shareholder level” discounts such as discounts for lack of marketability or lack of control; some element of goodwill is included, but discounts are disallowed; the case emphasizes that the spouses are unwilling sellers (or buyers); or the case emphasizes that the distribution must be “fair.”
Some states, such as Florida, Hawaii, Illinois, Missouri, Pennsylvania, South Carolina, Texas, and Wisconsin adhere quite strictly to the standard of fair market value, the price at which the property would change hands between well-informed, willing buyers and sellers on an arms-length basis. Some states, such as Arkansas and Louisiana mandate this standard by statute for the valuation of certain types of marital property. Those espousing the fair market value standard say that it is unfair to value the property that one spouse will receive at more than that spouse could actually realize in a sale.
The Concept of Value to the Owner
Other states adhere to the concept of value to the owner, reflecting whatever special circumstances may make the property more valuable to that owner than to someone else. Although the courts are not consistent in what they call this value, both business appraisers and real estate appraisers call it investment value. States that have used an investment value standard of value include Arizona, California, Colorado, Kentucky, Michigan, Montana, Nevada, New Mexico, North Carolina, and Washington (however, such use has not precluded the application of other standards in these states). Depending on the owner’s special circumstances, this value could be much higher than the value to other investors. The rationale for this position is that if a sale is not imminent, the question of how much the property would bring is irrelevant. States do not have totally consistent positions on this critical issue.
 See, e.g., Brown v. Brown, 792 A.2d 463, 2002 N.J. Super. LEXIS 105 (N.J. App. Div. 2002); Piscopo v. Piscopo, 557 A.2d 1040 (N.J. Super. 1989) (indicating that since both shareholder oppression and marital dissolution cases are brought in equity, it would be unreasonable to treat them differently).
 See, e.g., Bobrow v. Bobrow, State of Indiana, Hamilton Superior Court Cause No. 29D01-0003-DR-166; Howell v. Howell, 1998 WL 972312 (Va. Cir. Ct. Sept. 4, 1998), aff’d 523 S.E.2d 514 (Va. Ct. App. 2000).
 Ellington v. Ellington, 842 So. 2d 1160 (La. Ct. App. 2003).
 A.C.A. § 9-12-315(4) (2008).
La. R.S. § 9:2801-(1)(a) (2008).
 See, e.g., Golden v. Golden, 270Cal. App. 2d 401, 1969 Cal. App. LEXIS 1538 (Cal Ct. App. 1969) (in a community property state, the spouse’s contribution to the intangible value of the other spouse’s business is treated as an investment in stock).
 For definitions and discussion of various standards of value, see Shannon Pratt, Alina V. Niculita, Valuing a Business 29-54 (5th ed. 2008), and Jay Fisherman et al., Standards of Valuation: Theory and Applications (2007).
Shannon P. Pratt, CFA, ARM, ABAR, FASA, MCBA, CM&AA, is the founder and Alina V. Niculita, CFA, ASA, MBA, is the president of Shannon Pratt Valuations, Inc., a national business valuation firm located in Portland, OR. Dr. Pratt has more than ten books in print on various business valuation topics including valuations for marital dissolution purposes and he has testified on hundreds of occasions in various types of litigated matters including divorce cases. Ms. Niculita manages valuation engagements at Shannon Pratt Valuations, and has contributed to several business valuation books. www.shannonpratt.com
Fairness and Economic Reality in Business Valuation
In order to be fair, the valuation expert’s opinion must result in a value that is the cash equivalent of what the business owner could receive as of the agreed-upon cut-off date.