I am writing a book on business valuations for attorneys, tentatively titled, “Introduction to Business Valuation for Matrimonial Lawyers.” One of the chapters is on the standards of value. In that chapter, I focus on three standards of value – fair market value, fair value and investment value. It may not strike you as the most exciting chapter; however, the implications of standards of value in matrimonial litigation in North Carolina are significant.
Business valuation standards require that the valuation analyst identify the appropriate standard of value and perform procedures to develop a conclusion of value based on that standard. In addition, the valuation analyst must consider federal and state statutes, as well as case law. The last two are what I want to focus on – state statutes and case law. What is the required standard of value in North Carolina for matrimonial litigation?
The pertinent Statute in North Carolina is NC GS 50-20(c) which states:
There shall be an equal division by using net value of marital property and net value of divisible property unless the court determines than an equal division is not equitable. If the court determines that an equal division is not equitable, the court shall divide the marital property and divisible property equitably.
There are two key factors here. First, the use of “net value” in lieu of any established standard of value. What is net value? The second factor mentioned is important as well and removes some of the ambiguity and significance from the first factor. The second factor is an allowance in the statute for the court to determine what is equitable. Accordingly, there is no clearly defined standard of value that corresponds with the three that I listed above, only the responsibility of the court to determine what values and distributions are equitable. In addition to the statute, there are several cases that help to navigate these questions noted above.
While it would be great to review the cases in detail here, there is not enough space to handle each of the cases adequately in this article. In summary, the matrimonial litigation cases in NC do seem to indicate that there are explicitly and or functionally two standards of value that are used or considered. That would never be stated in a valuation report, but functionally it is happening. The two standards of value used are fair market value and investment value.
Fair market value is the “value in exchange” premise of value, which is what the business would be worth in an exchange. Several cases reference fair market value as the standard of value. Further, the inclusion of discounts for control and marketability point toward this standard of value. After all, discounts are applicable and logical only in an open market or in an exchange.
Investment value. The other standard of value used is the investment standard of value. Investment value is the “value to the holder” premise of value, which is what the business is worth to a particular owner or buyer. Case law dictating that there is no difference in personal goodwill and enterprise goodwill points toward an investment value. After all, personal goodwill has no value to the buyer in an open market. In particular, in the Hamby v. Hamby case, the husband owned a Nationwide Insurance business. There was certainly goodwill and value that he benefited from in owning and operating the business, which the court valued in this case. However, he could never recognize that value upon a prospective sale based upon provisions in his Nationwide contract prohibiting him from selling his book of business. This points to or highlights the value to the holder, or investment value.
The implications for these various standards of value are significant as valuation analysts consider issues of goodwill, normalizing adjustments to the financial statements, discounts for control and marketability, and how they will document all these aspects of their work in their report. This of course is significant as that report may be subjected to the scrutiny of testimony and cross examination, and perhaps appeal.