Business Evaluations in Divorce Cases Must Reflect Fair Value, Not Fair Market Value

Fair market value is the amount for which a property would be sold in a voluntary transaction between a willing buyer and a willing seller. It is important that neither the buyer nor seller is under an obligation to buy or sell. It is also important that both parties have a reasonable knowledge of the relevant facts.

In a divorce case, there is generally not going to be a sale. This creates a potential situation where the owning spouse is going to continue in the business and the non-owning spouse is not. The question that arises from this situation is, “What is the non-owning spouse entitled to in equitable distribution from the owner’s interest in that business?” To answer this question, our courts have held that the value of a business for equitable distribution purposes in a divorce case should be fair value, not fair market value. Fair value is the amount a shareholder should receive to be fully compensated for his/her ownership interest, which may not equate to what the market’s judgment is.

Since a closely held business has only a few shareholders, and there is little market for the stock, it has been acknowledged that closely held businesses have less value to outsiders and more value to its owners who want to keep the business, thus fair value is not equal to fair market value. Our courts have also determined that in establishing the fair value of a share of a business in a divorce case, marketability discounts and minority discounts may not be appropriate, since the shareholder is not selling his interest in the business. The New Jersey Appellate Division in Brown v. Brown stated:

Unlike Balsamides, Lawson, and Casey, no actual transfer of shares is involved in this equitable distribution case. That distinction makes the marketability discount even less appropriate than in the statutory appraisal or deadlock contexts, since no sale of the business appears likely in the foreseeable future. We see no reason to reward the spouse who holds title to the shares by allowing him to retain the value of the entire bloc at a bargain ‘price,’ that is, crediting the non-owner spouse with less than the owner’s proportionate share of full value when determining equitable distribution of the marital assets. Here, allowing the marketability or minority discounts would unfairly minimize the marital estate to [the wife’s] detriment and is inconsistent with the concept of equitable distribution. While ‘there is no ready market for the shares and consequently no fair market value’ of [the husband’s business, the husband’s ] shares in the going concern have value to him and to his co-owners that does not depend upon a theoretical sale to an outsider and has not changed as a result of the divorce complaint or judgment.