Last week, I gave a presentation titled “Intrinsic Value and Valuation Multiples” to a conference held by the Fairfax County (Virginia) Bar Association at the Omni Hotel in Nashville.  A significant portion of the lawyers in attendance were family law attorneys.  I was asked to make the presentation through a circuitous referral route and really enjoyed my time with the group.

My presentation discussed the intrinsic value standard of value in Virginia divorce-related valuations of closely held business assets.  In addition, I talked about developing valuation multiples with credibility.  This post addresses the intrinsic value standard of value.

To prove I was there, here is a picture of me with Julie Gerock, Managing Partner of Maddox & Gerrock (Falls Church, Virginia), who was our primary contact of the CLE session.

Intrinsic Value is Standard of Value

Intrinsic value is the standard of value for appraisals in the family law context in Virginia.  Since I have never previously worked on a divorce-related valuation in Virginia, I learned this fact while preparing for the talk.

I spoke with several business valuation guys with experience in the divorce arena in Virginia (Warren Miller, Bob Raymond, Bill Henderson, Jim Edge, and Bill Dacey), and read a bit of case law in anticipation of the presentation.  I thank them for their time; however, they are not responsible for my thoughts in this post.

One leading case is Howell v. Howell (31 Va. App (2000)).  From Howell, I learned the meaning of “value”:

“Value” is a mercurial term; the term has numerous, distinct meanings.  The various meanings are not interchangeable.  The meaning of the term, “value,” depends on what is being valued, who is interested, and why it is being valued.

Howell went on to define intrinsic value, or at least, to discuss it with some specificity.  The [numbers] are added to facilitate discussion below the quote.

[1] Intrinsic value is a very subjective concept that looks to the worth of the property to the parties. [2] The methods of valuation must take into consideration the parties themselves and the different situations in which they exist…Commonly, one party will continue to enjoy the benefits of the property, while the other will relinquish all future benefits. [3] Still, its intrinsic value must be translated into a monetary amount. [4] The parties must rely on accepted methods of valuation, but the particular method of valuing, and the precise application of that method to the singular facts of the case must vary with the myriad situations that exist between married couples.

Other prominent cases regarding the intrinsic value standard of value and valuation in Virginia include:

• Bosserman v. Bosserman 9 Va. App. (1989)
• Arbuckle II 27 Va. App. (1998)
• Owens v. Owens, 9 Va. App. 844 (2003)

The cases were either mentioned by the appraisers I spoke with or were in a paper by Judge Lorraine Nordlund (Fairfax Circuit Court).

Howell v. Howell involved a partnership interest in a prominent law firm.  To the best of my knowledge, none of the recent cases involved substantial businesses, with the majority addressing issues with law firms or professional practices.  However, business appraisers must look at the valuation of closely held company assets through the lens of existing case law.

ASA Glossary Definition of Intrinsic Value

The definition of “intrinsic value” according to the ASA Business Valuation Standards Glossary is:

The value that an investor considers, on the basis of an evaluation of available facts, to be the “true” or “real” value that will become the market value when other investors reach the same conclusion.

Intrinsic value, according to this definition, is something like an investment value that is based on the informed perceptions of a particular investor.  This investment value may differ from the general opinion of the broader markets, but would be expected to reconcile with the markets when the rest of the world reaches the same conclusion.

It is clear is that there is a considerable difference between the definition of intrinsic value and the discussion above in Howell.  

Comments on Virginia Intrinsic Value

The following comments relate to the [numbers] in the quote from Howell above.

[1] Intrinsic value is a subjective concept and relates to the worth of the property to the parties. This “worth” can be likened to the value of the property in use and from which the parties are deriving benefits.  Intrinsic value was likened by several to be analogous to statutory fair value in Virginia.

The more typical divorce standard of value is that of fair market value.  Fair market value is a “willing buyer and willing seller” concept.  Fair value has been likened to a “willing buyer and unwilling seller” concept.  Virginia courts desire to protect the “unwilling sellers” of marital assets, which makes a lot of sense.  So in general, there are no minority interest or marketability discounts applicable in most Virginia divorce valuations.

[2] Valuation methods must take into consideration the variety of situations in which married couples might exist.  The courts recognize that with closely held business assets, there is usually a division of assets such that one party retains the asset and the other does not.

I’m not sure how a business appraiser is “to take into consideration the parties themselves and the different situations in which they exist.”  But the courts will do so.  Someone will keep the asset and someone else will not.  Matrimonial court is a court of equity, and judges are rightly seeking equity for the parties.

[3] Courts are required to put a dollar amount on the closely held business assets that they encounter.  This is where business appraisers come in.

[4] This fourth aspect of intrinsic value can be problematic for business appraisers, who will always (hopefully) rely on accepted business valuation methods.   However, who decides on valuation methods “when the particular method of valuing, and the precise application of that method to the singular facts of the case must vary with the myriad situations that exist between married couples”?

I likened this to an old baseball during my talk:

The batter is at the plate.  The catcher is in place, and the umpire leans into his back.  The pitcher is on the mound.  He shakes his head “no.”  He then shakes his head “yes.”  The pitcher winds up and throws a mighty fast ball, and the batter took the pitch.

Nothing happened for a few seconds and the catcher looked back at the umpire and asked “Well, ball or strike?”

The umpire looked at the catcher and then at the batter and said, “That pitch isn’t a darned thing until I say what it is!”

By analogy, I guess the appropriate valuation methods are the ones that a judge calls from the bench.

Analogy to Fair Market Value

As I talked to Virginia business appraisers (and during the meeting with a couple of judges), it occurred to me that for most businesses Virginia intrinsic value could be compared with fair market value.  As I read things, intrinsic value may be the functional equivalent of the fair market value of a business at the financial control level of value.

On the levels of value chart, this would be at the middle conceptual level, as seen below:

I did not get much pushback from either of the Virginia appraisers I talked with or from the judges on the panel.

My point for all parties to Virginia divorce valuation is that “intrinsic value” is not really operational as a standard of value for appraisers.

According to the ASA Business Valuation Standards Glossary, the standard of value is “the identification of the type of value being used in a specific engagement, e.g., fair market value, fair value, investment value.”

The standard of value sets the rules of the game for business appraisers.  We generally know the rules for the fair market value game.  However, the rules of the intrinsic value game in Virginia are set by courts on a case-by-case basis.

It might be a good idea for a business appraiser to specify his or her appraisal in a Virginia matrimonial matter as follows:

Standard of Value: Intrinsic Value (as discussed in Howell v. Howell).

Level of Value: There are no specific “levels of value” mentioned in Howell v. Howell or other precedent cases.  Based on our reading of precedent cases from business and valuation viewpoints, there is a general prohibition against the application of minority interest and marketability discounts.  We, therefore, interpret the level of value as the equivalent of the fair market value at the financial control level (as indicated in the chart above).

If an appraiser were to specify a Virginia engagement as noted above, he or she could make typical assumptions in the context of fair market value.  If the judge thought that other assumptions were appropriate in the context of his or her interpretation of intrinsic value, the alternate assumptions could be made.  Then, the appraiser is not in the business of attempting to take into account the many factors that relate to the “equities” of the situation.

Conclusion

It was a pleasure to address the Fairfax County Bar Association last week in Nashville.  I hope they learned something from our session.  I know that I did.

Feel free to comment regarding this post below.  I especially encourage appraisers or attorneys with experience in Virginia family law appraisal to do so.  If you would like to download a copy of the overheads from my presentation, click here.

There is undoubtedly more to learn!

Be well,

Chris

---

New Book on Buy-Sell Agreements

The drafting of a new book on buy-sell agreements is almost complete.  The working title is Buy-Sell Agreement Handbook for Attorneys.  I am not an attorney.  As always, I write based on my experience as a businessman and valuation guy.

My previous books on buy-sell agreements have been written from the perspective of business owners as in the title of the most recent book: Buy-Sell Agreements for Closely Held and Family Business Owners.  Attorneys were, thankfully, one of the bigger markets for this book.

Many times, however, attorneys have said to me, in effect, “Chris, we like the ideas in your book.  Do you have some template language to help us implement them?”

Until now, unfortunately, the answer was a “Not yet.”  Now, this new book will contain detailed template language for several valuation processes for buy-sell agreements. I’m excited to get it to the point of making it available to attorneys, business appraisers, financial planners and, yes, business owners.

If you want to be notified when Buy-Sell Agreement Handbook for Attorneys becomes available, give me a quick email and we will put you on the list at  mercerc@mercercapital.com.