There are smart people who spend their entire lives learning how to value a closely held business. You don’t have the time to do that in the midst of divorce, and neither do I.
What I can do, and what you can do too, is to understand a little terminology – to develop a working understanding of the methods used to value a business. Then you’ll be able to talk intelligently to one of those experts and have a rough idea what they mean.
- What is Value?
- Fair Market Value
- Locating a Valuator
- A Quick Primer on Value
- Special Considerations
- Dutch Auction
Book value is an accounting term. Technically, it is simply the assets of the enterprise less its liabilities, all at their values as stated on the books of the company. It’s usually not an accurate measure of the real value of the company. For that reason, it’s seldom relevant.
The liquidation value of a company is the value of its individual assets, valued as if the company will not continue to carry on business. There are actually two “flavors” of liquidation value, depending on the time available for the liquidation process:
- Orderly liquidation value. This assumes that the enterprise can afford to sell its assets to the highest bidder. It assumes an orderly sale process. It assumes that the seller can take a reasonable amount of time to sell each asset in its appropriate season and through channels of sale and distribution that fetch the highest price reasonably available.
- Distress liquidation value. This is a “fire sale” price. This assumes that the enterprise must sell all its assets at or near the same time, to one or more purchasers. The assumption is that the typical purchaser for the assets is a dealer who specializes in the liquidation of the entire assets of a company. For obvious reasons, the Distress Liquidation Value will always be lower than the Orderly Liquidation Value. Depending on the enterprise and the nature of its assets, the difference between the two values can be dramatic.
Fair Value is primarily a term used in stockholder litigation, and particularly where the company is attempting to “squeeze out” one or more minority shareholders. Determination of Fair Value is laced with issues revolving around the value of corporate control. Fair Value is rarely relevant in valuing closely held businesses in divorce.