Foreword

The authors of this very useful book have again asked me to write the Foreword. I'll start this with the ending in the Foreword I wrote in the first edition. “Shannon, Jay, and Bill, thank you for putting the time into this. It's a welcome enhancement to our profession's body of knowledge.”

Since the first edition was published in 2006, I can't tell you how many times I have referred to it. It is a very valuable and easy-to-navigate resource. It's incredible that these three authors have put so much time into keeping us all up to date in the practice areas of tax, divorce, dissenting rights and shareholder oppression, and fair value for financial reporting. These four areas make up four of the six chapters.

Right up front, it is important to note that this book is not just about the definitions of the various standards of value. The real value of this important resource is that the authors have taken an enormous amount of time to explain the history, evolution, and application of standards of value in different venues. Also, for state-specific valuations, such as marital dissolution and shareholder dissent and oppression, they have looked at all the states and provide definitions, nuances, applications, supporting regulations, statutes, and case law.

They have also added a new chapter, “Standards of Value for Partnership and Limited Liability Company Buyouts.” This chapter discusses general partnerships, limited partnerships, limited liability partnerships, and limited liability companies. These types of business entities are often misunderstood by valuation analysts, often to the detriment of their clients and their advisors. Nowhere else have I ever seen these types of entities discussed in such detail. Furthermore, they present individual states' definitions of value under partnership statutes and relevant court cases.

The proper definition of the standard of value sets the criteria upon which valuation analysts rely. Among many factors, it dictates whether you use a hypothetical buyer and seller, a market-participant buyer and seller, value to a single person, or a willing or unwilling buyer and seller. It also sets the stage for consideration of the various levels of value and whether discounts and/or premiums apply. My experience with standards of value in various dispute settings makes me realize how different the value can be if the analyst uses the wrong standard of value. It can also make your work indefensible, regardless of whatever good valuation work you perform.

This book, with its well-known group of authors, helps clarify an area that many analysts think is simple and straightforward. It is anything but that. This is a complex area with differing interpretations, particularly when dealing with multiple definitions within each state. Even the universally defined standard of value—“fair market value”—has some interpretation problems. Sure, it's a willing buyer and seller, a hypothetical buyer and seller, with no compulsion and both with reasonable knowledge of the relevant facts. However, who are the hypothetical buyer and seller? Is it the most likely buyer and seller? Some courts say no. Is it the average buyer and seller? If so, how do you average people? Is it a standalone value, a strategic buyer or a financial buyer? These are tough questions concerning a standard of value that many analysts choose to ignore. This book breaks down the walls of uncertainty and does much to help answer many of these difficult questions.

The authors connect the dots by introducing five standards of value: fair market value, investment value, intrinsic value, fair value (state actions), and fair value (financial reporting). They put these into service line applications for valuations in tax, marital dissolution, dissenting rights and shareholder oppression, and financial reporting. The various standards of value are then connected to the service line applications through the premise-of-value concepts of “value in exchange” and “value to the holder.”

Again, one of the best parts of the book is the obvious attention to detail concerning the standards of value and their definition, by state, for marital dissolution and dissenters' rights and shareholder oppression. There are charts showing each state and the important cases that set the criteria for valuation in these two areas. These charts will be extremely helpful to valuation analysts who practice in multiple states, as well as a good refresher for those whose practices are more local or regional.

In Chapter 5, “Standards of Value in Divorce,” the authors present clear, concise charts titled “Continuum of Value.” For example, one of these charts links the premise of value to the standard of value and segments it into enterprise and personal goodwill, with references to relevant case law and the important underlying assumptions. Discounts and premiums and the effect of buy–sell agreements are also presented and explained.

Gil Matthews and Michelle Patterson have substantially rewritten Chapter 3, “Fair Value in Shareholder Dissent and Oppression,” which now also includes a section that discusses shareholder dissent in Delaware.  The exhibits include, on a state-by-state basis, the applicability of the market exception for appraisals, the availability of the buyout remedy in oppression, statutory language regarding valuation techniques, and summaries of significant court decisions regarding discounts. 

The chapter on “Fair Value for Financial Reporting,” Chapter 6, has benefited immeasurably by the changes that have occurred since 2007 as well as the rewriting by Neil Beaton.

All of the chapters include the history and development of the standard of value and concise summaries of relevant case law and applicable regulations, statutes, and standards. Again, readers may think this is a simple subject. However, as the authors have so eloquently presented here, it is quite complex. These authors have done their homework and compiled the state-by-state research to help valuation analysts better understand the many nuances within each state. I'll end as I began. Shannon, Jay, and Bill, thank you for putting the time into this. It's a welcome enhancement to our profession's body of knowledge.

James R. Hitchner, CPA/ABV/CFF, ASA
Managing Director, Financial Valuation Advisors
President, The Financial Consulting Group
CEO, Valuation Products and Services
Editor in Chief, Financial Valuation and Litigation Expert