Today’s business climate will result in an inevitable rise in business divorces that involve commercial real estate assets. How will stock or an LLC interest in the company that owns such real estate be valued?
Fair Market Value versus Fair Value (Yes one word makes a big difference)
People who own real estate companies typically sign an agreement that determines the rights of the owners in case of a business divorce. The most important issue is usually determining the value of the ownership interest being sold. You may not realize that fair market value and fair value are very different.
Fair Market Value
Fair Market Value is the value of the ownership interest after applying any applicable discounts. Why would a discount apply to an ownership interest? An example best explains what a discount is. When you own less than 50% of a company, you own a minority interest and have no right to control what the company does with its real estate assets. The fact that you lack the right to direct what the company does makes your interest less valuable. The decrease in value that results from your lack of company control is the discount.
Fair Value
Fair value means that your shares are valued without applying any lack of control or other discount. For example, if a company is worth 1,000,000 and you own 49% your shares are worth 490,000. Fair value also applies if you dissent to a corporate transaction under the Georgia dissenter’s rights statute. Georgia courts apply fair value and not fair market value in such cases.
In closing,
Fair Market Value = discounts will apply to the value of the ownership interest
Fair Value = discounts do not apply to the value of the ownership interest
What a difference one word makes!!!
Justin S. Daniels, Esq., MBA
Wagner, Johnston & Rosenthal, P.C.
5855 Sandy Springs, Circle, Suite 300
Atlanta, Georgia 30328-4834
(404) 835-5260, phone
(404) 835-5160, fax
(404) 229-6847, cell
jsd@wjrlaw.com, email
my bio: www.wjrlaw.com
