Message to divorce courts: FMV may not be equitable

Recently, BVWire covered a Texas divorce case (Mauceri) that grappled with the issue of whether to include the value of a covenant not to compete (CNTC) when calculating marital assets. The wife’s expert showed that discounting the stipulated FMV for lack of a CNTC amounted to a discount to the commercial—not personal—goodwill of the business. What’s more, the discount would be a windfall to the husband equal to exactly 50% of the difference between the FMV with and without a CNTC (assuming a 50-50 division of assets).

An article in the August issue of Business Valuation Update offers more insight into this issue. Specifically, the article points out the unfairness of marital assets being used to acquire a professional practice on an undiscounted basis only to be valued on a discounted basis upon dissolution of the marriage. The article is “Personal Goodwill and Noncompete Agreements: Folklore vs. Common Sense,” written by Robert M. Dohmeyer and Peter J. Butler.

Courts need educating: William E. Holmer, president of the First Princeton Corp. (Lake Oswego, Ore.), agrees with the equitable analysis put forth in the article and comments: “In the 39 non-community property states, most jurisdictions call for an ‘equitable’ distribution of the marital assets. However, the standard of value to be used is not specified. In case law, however, FMV is the predominant standard of value. Our job as appraisers is to educate the courts that FMV, that is, the value to a hypothetical third party, may not always result in an equitable distribution of the marital assets. Investment value, that is, the value to the marital estate, may be a more appropriate standard of value.”

Dohmeyer, one of the article’s authors, comments: “Mr. Holmer points out that appraisers still calculate FMV as if sold to a third party and that we need to educate the courts that this practice creates a windfall to the owner spouse since he or she will not compete with him/herself.  We agree completely. In our paper we discuss one way around this by still calculating FMV (as opposed to investment value) but assume the relevant probability of competition (zero) since the business is going to be distributed to the owner operator and not a hypothetical third party."