The
value of something is what that item
is worth. For some items, a value is readily
determinable. For example, if you own a
$25,000 Government of Canada treasury bill, you can look up the current quoted
yield and calculate its value. However,
if you own an apartment block or 10% of the shares of a private company, the
value will likely not be so easy to determine.
And, like beauty, the value of those assets will not be the same to all
beholders. In order to assess their
value, a more precise description of the concept of value to be applied is
required. The descriptor will identify
factors such as the circumstances under which the value is to be determined and
who the beholders are.
Statutes
and agreements often require the use of fair market value. Fair market value is determined in a notional
market. A discussion of fair market
value is contained in a companion article on our website.
Fair
value
is another notional concept. It is used
in corporate law in oppression and dissent remedies and sometimes in family
law. The starting point for a fair value
determination is generally fair market value.
Adjustments are made to achieve what is perceived to be a more just and
equitable value in the specific context, having regard to all of the circumstances. As an example, fair value will generally not
reflect a discount in the valuation of a minority interest.
The
term fair value is also used for certain measurements that are required under
generally accepted accounting standards.
In this context, the term has a different meaning and fair value is
determined based on the rules contained in the accounting standards.
In
expropriation situations, value to owner may be
considered. It is compensatory in
nature. For this reason, it may include
an amount that would otherwise be considered personal goodwill. In a forced sale, value to owner may exceed
fair market value because it considers the entire direct and indirect loss that
the owner would suffer if the owner were deprived of the property. For example, the owner of a small business
operating in premises that are being expropriated might be unable to find new
premises from which to conduct the business in the same area. For that owner, the value of those premises
may exceed the market value of the underlying real estate as the loss of the
premises will also result in the loss of the business earnings. Likewise if, because of an owner’s
relationship with the other shareholders, ownership of a 10 or 20% interest in
a private company secures the owner a job that, for personal reasons, he or she
prefers to jobs otherwise available, the value of those shares to that owner
may exceed their fair market value.
Agreements
between shareholders may specify how the value of the company’s shares is to be
determined. A shareholder agreement
might specify the quantum of minority discount to be applied or that no
minority discount should be reflected in the value in order to ensure that
subsequent transactions occur on the same basis as the initial investment. Alternatively, it might specify that a going
concern asset based approach be used, i.e. that no value is to be ascribed to
goodwill, or impose a ceiling on the value of goodwill to ensure that the
remaining shareholders will be able to finance the acquisition of the departing
shareholder’s shares.
The
circumstances under which a valuation is being prepared also influence
value. If a business is to be wound up
and its assets sold piecemeal, its value would be its liquidation value. If the assets are expected to be sold over a
reasonable period of time in order to maximize the proceeds received, an orderly
liquidation value should be determined.
A forced liquidation value is determined when the assets are to
be sold as quickly as possible or when the costs that would be incurred to
maximize proceeds exceed the increase in proceeds that is anticipated.
Wolrige
Mahon LLP has professionals with
experience in determining value in these situations. Please contact us for assistance.
