Business Valuation for Divorce

In divorce cases, it is critical that the divorcing parties and their attorneys understand the applicable Standard of Value and handling of Personal Goodwill in their state.

Standard of Value

The standard of value defines the value to whom and under what assumptions.  This includes both real and hypothetical circumstances.  All value is a function of the present worth of the future benefits the ownership interest is expected to generate for the holder of that interest.

Fair Market Value vs. Investment Value

In divorce cases, the standard of value determines whether the interest is valued as if it is to be sold (Fair Market Value) or valued as if it is held by a specific individual (Investment Value).

  • Fair Market Value assumes the interest is exchanged in an open market.  It typically includes adjustments for lack of marketability and control.
  • Fair Value is applied in some divorce cases as Fair Market Value without adjustments for lack of control.
  • Investment Value is the value to a specific individual.  This can be applied as if in exchange (sale) or to the current owner.  In some divorce cases it is applied as the value to the holder.
  • Some states apply hybrid standards that may be a mix of Fair Market Value, Fair Value, and Investment Value.
Personal Goodwill

The International Glossary of Business Valuation Terms defines goodwill as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.”  This goodwill can attach to the enterprise or to the working owner depending on the facts and circumstances regarding the relationships with the customers and other outside stakeholders.

In 32 states, personal goodwill is not considered a marital asset.  In three of these states, no goodwill, including enterprise and personal goodwill are considered marital assets.

The following table shows generally where each state stands regarding a standard of value and whether personal goodwill is considered a marital asset.  However, these are generalizations, and each state has its own particular nuances.  Please contact us for specific information regarding your state.

Table of Standard of Value and Personal Goodwill in Divorce by State
State Standard of Value in Divorce Is Personal Goodwill a Marital Asset?
Alabama Fair Value Undecided
Alaska Fair Market Value No
Arizona Investment Value Yes
Arkansas Fair Market Value No
California Investment Value Yes
Colorado Investment Value Yes
Connecticut Fair Market Value No
Delaware Fair Market Value No
District of Columbia Fair Market Value Yes
Florida Fair Market Value No
Georgia Fair Market Value No
Hawaii Fair Market Value No
Idaho Fair Market Value Yes
Illinois Fair Market Value No
Indiana Fair Market Value No
Iowa Fair Market Value Undecided
Kansas Fair Market Value No (includes all goodwill)
Kentucky Fair Market Value No
Louisiana Fair Market Value No
Maine Fair Market Value No
Maryland Fair Market Value No
Massachusetts Fair Value No
Michigan Investment/Fair Market Value Yes
Minnesota Fair Market Value No
Mississippi Fair Market Value No (includes all goodwill)
Missouri Fair Market Value No
Montana Investment/Fair Market Value Yes
Nebraska Fair Market Value Yes
Nevada Investment Value No
New Hampshire Fair Market Value No
New Jersey Fair/Investment Value Yes
New Mexico Investment Value Yes
New York Investment/Fair Market Value Yes
North Carolina Fair Market Value Yes
North Dakota Fair Market Value Yes
Ohio Fair Market Value Yes
Oklahoma Fair Market Value No
Oregon Fair Market Value No
Pennsylvania Fair Market Value No
Rhode Island Fair Market Value No
South Carolina Fair Market Value No (includes all goodwill)
South Dakota Fair Market Value Undecided
Tennessee Fair Market Value No
Texas Fair Market Value No
Utah Fair Market Value No
Vermont Fair Market Value No
Virginia Fair Value No
Washington Investment Value Yes
West Virginia Fair Market Value No
Wisconsin Fair Market Value Yes
Wyoming Fair Market Value No

Case Study

Divorce: Fair Market Value – Accurate Allocations

The owner of a $3.7 million technology company was going through divorce proceedings. MBA was retained to determine the fair market value of the business and related marital asset.

The report documented that the owner had started the business before the marriage, and substantiated that the value of the business had increased only marginally during the time of the marriage.

MBA valued the business as of the start of the marriage and as of the end of the marriage. The two values allowed the family court to identify the change in value of the business during the time of the marriage, which is the value attributable as a marital asset.

The Result:
Both parties received an accurate allocation.

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