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1 What's Fair About Fair Market Value?

What's Fair About Fair Market Price?

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

Imagine a scenario in which your clients are separating, and the partner is a successful psychologist. For the sake of the example, assume even more that her practice is so successful that she earns over $500,000 every year in her practice, much higher than the industry criteria of $250,000 for solo professional psychologists with her level of education.

In a divorce in Washington State, lawyers must be aware of when and how Washington's "fair worth" standard might enter play in figuring out the worth of a privately held business. In specific circumstances, reasonable market value (FMV) and fair worth analyses will lead to significantly various conclusions and attorneys who are unaware of the application of fair value might encourage their customers to accept a value for their organization interest far below what could be granted.

Definition of Value

In business valuation, appraisers are most typically engaged to figure out value under the fair market price standard. Fair market price (FMV) is defined by the American Society of Appraisers as:

"The rate, revealed in terms of cash equivalents, at which residential or commercial property would change hands in between a hypothetical willing and able purchaser and a hypothetical ready and able seller, acting at arm's length in an open and unlimited market, when neither is under compulsion to purchase or offer and when both have affordable knowledge of the appropriate realities."

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

In dissenter's rights actions in Washington State, courts identify the "reasonable value" of the investor's interest, as opposed to the "fair market worth."2 In Washington, for the function of a shareholder injustice match, it is agreed that "fair value" does not consist of a discount for minority status.3

"Fair worth" is not associated with "fair market price."4 While FMV pertains to determining reasonable worth, the situations of a specific case are vital to identifying fair worth.

If the parties are getting separated and they own one hundred percent of a profitable business, the application of reasonable worth versus FMV will most frequently not enter play due to the fact that the FMV of a 100 percent ownership interest in a profitable service is typically equal to reasonable worth.

However, in specific cases, identification and acknowledgment of the reasonable worth standard is critical to coming to the correct value conclusion for the customer.

Example # 1: The Professional Practice

Let's return to the example of an other half's growing psychology practice. Fair market value (FMV) and reasonable value analyses will result in significantly different conclusions in this case.

In identifying FMV, most would agree that the "property technique" to valuation need to be applied, which assigns worth to the concrete properties minus liabilities. In this engagement, concrete assets would consist of money, balance due, and likely computers, desks, and furniture, web of liabilities. However, the worth would not include any intangible worth, or "goodwill," for the simple fact that her patients and files are personal. It would breach HIPAA5 and her ethical standards to disclose this details