Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature
by Joseph W. Cunningham, JD, CPA
Of late, the holder’s interest standard – or measure – of value for appraising professional and commercial enterprises for divorce has been subject to criticism. The following addresses issues raised.
Holder’s Interest Value—“Holder’s interest” value – also referred to as investment value to the owner – of a business appraised for divorce settlement purposes is essentially the value to the current owner based on financial benefits consistently received from the business, unless there is reason to believe the business will soon be sold or discontinued.
The underpinning is that financial benefits provided by the company are often the product of contributions by both spouses during marriage such that both should share in that value in a divorce settlement.
If that value is not transferable in a sale – such as a surgeon’s referral sources or a widget maker’s personal relation- ship with a valuable customer – it will only be reflected in the business value if it is assumed the current owner will continue the enterprise after the divorce.
Fair Market Value—Holder’s interest value is distinguished from the most commonly known standard/measure of value – fair market value (FMV) – defined as the price at which a business would sell between a willing buyer and a willing seller, both well informed and acting at arm’s length, and neither acting under duress.
The principal difference is that holder’s interest value is premised on the current owner retaining the business post- divorce, whereas FMV is premised on a hypothetical sale to a third party.
In determining FMV of a non-marketable closely-held business, a lack of marketability discount, typically in the 25%-35% range, is deducted from the calculated value – that is, between 1/4 and 1/3 of the total value is eliminated based on the assumption of a hypothetical sale. Aside from this significant discount, valuable but non-transferable attributes of the enterprise – such as noted above – will not be captured in the hypothetical sale value.
Premise of Holder’s Interest Value—Jay Fishman, a nationally renowned business valuation expert, at an American Academy of Matrimonial Lawyers 2006 seminar, presented the following quote from the California appellate court in its landmark Golden v. Golden opinion in support of value to the owner:
“… in a matrimonial matter, the practice of the sole practitioner husband will continue, with the same intangible value as it had during the marriage. Under the principles of community property law, the wife by virtue of her position of wife, made to that value the same contribution as does a wife to any of the husband’s earnings and accumulations during marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business.”
In this regard, there is no substantive difference between community property law and Michigan’s equitable distribution statute concerning contribution of the non-business owner spouse.
Michigan Court of Appeals Holder’s Interest Decisions
—As summarized at the end of this article, the Michigan Court of Appeals has consistently approved use of holder’s interest value where there is no indication that the owner will not continue to operate the enterprise post-divorce.
Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)