July 1997

Standards of Value Used in Colorado Divorce Cases

Typically, the standard of value used to value a business for divorce purposes is either:

• Fair Market Value, which is based on the value in a hypothetical purchase or sale transaction.

• Intrinsic (Investment) Value, which determines the value of the business based on its worth to a specific owner.

Colorado statutes 14-10-113, on disposition of property, do not define a standard of value to be used in valuing a closely held business. Two court of appeals cases do give guidance in valuing goodwill in a closely held business.

In re the Marriage of Martin, 1985, the court tells us, "the value of goodwill is not necessarily dependent upon what a willing buyer would pay for such goodwill: rather, the important consideration is whether the business has a value to the spouse over and above the tangible assets".

In re the Marriage of Graff, 1994, the court reaffirms Martin as it relates to the value of goodwill as "not necessarily dependent" upon what a willing buyer would pay for such goodwill but what the goodwill is worth to the spouse.
 

What does all this mean?

In my layman's opinion, the appeals courts language "not necessarily dependent upon" means the trial court can choose to adopt either the fair market value standard or the investment value standard for valuing goodwill.
 

Unanswered questions?

How will the courts rule on other potential valuation theory differences between the two standards of value, including capitalization rates, minority discounts, and marketability discounts?

How can the valuation expert know and quantify how the value to a specific spouse differs from the value to a hypothetical buyer?

Mediation/Negotiation

Contrary to the above title, I do not advocate threatening people in a negotiation. However, as they say, there is a time and place for everything. Over the years, I have had the opportunity to witness many threats during the negotiating process. More times than not, the threats were not as effective as they could have been.
 

R. Fisher in his book, International Conflict for Beginners, gives us a somewhat Machiavellian, but nonetheless useful checklist of elements of a well thought out threat. He says that if a threat is to be made, and if it is to be framed explicitly, the party making the threat should be clear that:
 
 

• S/he is willing to carry out the threat if called upon by the other party to do so.
• S/he has the resources to carry out the threat.
• The threat will not result in any unanticipated negative consequences.
• The other party believes that the threatening party has the will and resources to carry out the threat.
• The party receiving the threat has not already calculated the potential damages to him or herself as a result of the threat, and decided that these damages are an acceptable cost to bear to defend his or her interest.

I think if negotiators would test their threats against the above checklist, there would be fewer but more effective threats made.