What's Fair About Fair Market Value?

By Laura Markee, CFA, ASA, Markee Valuations September 2020 Bar Bulletin September 1, 2020

Imagine a circumstance in which your customers are divorcing, and the partner is a successful psychologist. For the sake of the example, assume further that her practice is so successful that she earns over $500,000 each year in her practice, much greater than the market benchmark of $250,000 for solo professional psychologists with her level of education.

In a divorce in Washington State, lawyers should understand when and how Washington's "fair value" requirement may come into play in determining the value of a privately held company. In particular situations, fair market value (FMV) and reasonable value analyses will result in considerably various conclusions and attorneys who are uninformed of the application of fair value may advise their customers to accept a value for their service interest far below what could be awarded.

Definition of Value

In company valuation, appraisers are most typically engaged to determine worth under the reasonable market price requirement. Fair market price (FMV) is defined by the American Society of Appraisers as:

"The cost, expressed in regards to money equivalents, at which residential or commercial property would alter hands in between a theoretical prepared and able purchaser and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under obsession to buy or sell and when both have affordable understanding of the relevant truths."

Although FMV is the standard of value in a marital dissolution context in numerous states, in Washington, the reasonable worth standard is used. Unlike FMV, there is no commonly accepted meaning for reasonable value. In the AICPA's released SSVS,1 it is kept in mind that, "for state legal matters just, some states have laws that use the term fair worth in investor and partner matters. For state legal matters only, for that reason, the term might be defined by statute or case law in the particular jurisdiction."

In dissenter's rights actions in Washington State, courts determine the "fair value" of the investor's interest, rather than the "fair market price."2 In Washington, for the function of a shareholder oppression suit, it is concurred that "reasonable value" does not include a discount rate for minority status.3

"Fair worth" is not associated with "reasonable market worth."4 While FMV is pertinent to figuring out fair worth, the circumstances of a particular case are vital to figuring out reasonable worth.

If the celebrations are getting separated and they own one hundred percent of a lucrative business, the application of fair worth versus FMV will most often not enter into play because the FMV of an one hundred percent ownership interest in a profitable service is often equal to reasonable value.

However, in certain cases, identification and of the fair value standard is critical to getting here at the correct worth conclusion for the client.

Example # 1: The Professional Practice

Let's return to the example of an other half's prospering psychology practice. Fair market worth (FMV) and reasonable worth analyses will lead to considerably different conclusions in this case.

In figuring out FMV, a lot of would concur that the "property technique" to valuation should be used, which assigns value to the concrete properties minus liabilities. In this engagement, concrete assets would include cash, receivable, and most likely computers, desks, and furniture, web of liabilities. However, the value would not consist of any intangible value, or "goodwill," for the simple fact that her clients and files are private. It would break HIPAA5 and her ethical standards to disclose this information