Often in Divorce Valuations the interest being valued is not being sold but instead is being awarded to one spouse. Commonly the standard of value urged upon the Court is a Fair Value Standard. Under the fair value standard, discounts for lack of marketability or lack of control are eliminated. Elimination of these discounts can make a very substantial difference in the value assigned to the interest in a business or professional practice. It has been found that ‘the value to be ascribed to shares in a family company must be a realistic one, based upon the worth of the shares to the party himself or herself.’ Harrison and Harrison (1996)
It is basic valuation theory that the value of a business is equal to the present worth of the future benefits of ownership. This statement is a fundamental principle of business valuation. This is bolstered by the fact that, “a rational buyer normally will invest in a company only if the present value of the expected benefits of ownership are at least equal to the purchase price." Likewise, a rational seller normally will not sell if the present value of those expected benefits is more than the selling price. Thus, a sale generally will occur only at an amount equal to the benefits of ownership.”
In Divorce Valuations using the Future Maintainable Earnings methodology, we are determining the value of an income stream. The methodology determines the value of the business and not the price at which it may change hands. The methodology makes no assumptions as to the price on sale. It represents the present value of the future income flows from the business. Value and price are often not the same, as price may reflect other benefits that ownership of the business may confer such as synergies with existing businesses, a job, the desire to be self employed, lifestyle decisions etc.