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FRB v DCA: Back to base-ics

Thomas Rodwell and Gavin Dallow, chartered accountants and business valuation experts of Rodwell Dallow Advisory, explain different bases of value and the impact they can have on business valuations in the light of Cohen J’s judgment in FRB v DCA [No. 2] [2020] EWHC 754 (Fam)

Thomas Rodwell and Gavin Dallow
, founding directors of Rodwell Dallow Advisory, a specialist valuation practice providing analysis, advice and expert evidence in family and commercial disputes.


The recent case of FRB v DCA [No. 2] [2020] EWHC 754 (Fam) is a good illustration of the tension that can arise between established principles of valuation, as applied by court appointed experts, and the fair outcomes sought by family judges.

In the words of Cohen J, the case of FRB v DCA was the "perfect example of [a] quasi-partnership" and, as such, he chose not to adopt the (significant) discount that the expert had applied when valuing the husband's interests (at [3]).

In this article, we explain different bases (or standards) of value and the impact they can have on business valuations. In doing so, we consider whether the basis upon which business valuations are performed by court appointed experts are compatible with concepts of quasi partnership, familial arrangements and other party specific factors that are relevant to financial remedy proceedings.

It's all about the base…

In most 'real world' transactions, the price that is paid for an interest in a business will reflect factors specific to the parties negotiating the sale. However, when hypothetical valuations are performed, say for the purpose of financial remedy proceedings, certain assumptions are required.

A critical set of assumptions is captured by the 'basis of value' (sometimes referred to as the standard of value). The basis of value determines several factors, including whether the valuer should consider a hypothetical transaction or an actual transaction.

There are many different bases of value, with definitions provided by a wide variety of institutions such as the International Financial Reporting Standards (IFRS), Organisation for Economic Co-operation and Development (OECD) and the International Valuation Standards (IVS).

Many of those definitions have common elements, for example, an assumed valuation date. Importantly, the basis of value also determines whether the expert should consider an actual or hypothetical transaction; the specific characteristics of the parties; or whether certain benefits gained from owning the business should be included.

To illustrate these differences, we summarise two bases of value which are often relevant in valuations performed in financial remedy proceedings. These are Market Value and Equitable Value, as defined by the IVS.

Market Value is "the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction … without compulsion-" [emphasis added]. Market Value specifically excludes special considerations or concessions granted by anyone associated with the sale, or any value available only to a specific owner or purchaser 1

The definition of Market Value also makes clear that "the factual circumstances of the actual owner are not a part of this consideration because the willing seller is a hypothetical owner" and that the transaction is "presumed to be between unrelated parties, each acting independently" 2

Equitable Value, on the other hand, is defined as the "estimated price agreed between identified knowledgeable and willing parties that reflects the respective interests of those parties" [emphasis added] 3.   That is, unlike Market Value, Equitable Value requires an assessment of the respective advantages or disadvantages that the parties will receive from the transaction.

What basis of value does the Family Court use?

In FZ v SZ and another [2010] EWHC 1630, Mostyn J acknowledged the difficulties associated with considering different bases of value and explained that: "present market value should be the usual measurement of value and that fair/hope/economic values should only be used in the exceptional case" (at [118]).

We consider that this is helpful guidance. This is because in many cases the variances that arise from differing assessments of Market Value and Equitable Value will be negligible and a thorough examination of those differences disproportionate. However, there are occasions when such differences are significant and establishing the correct basis of value will be an important step in ensuring that the valuations prepared by experts are fit for purpose and of maximum use to the parties. Mostyn J considered that these cases should be 'exceptional'.

In these cases, it is important for the expert to consider the factors that could cause differences and explain the reasons for those differences to the court. FRB v DCA is one such example.

Quasi-partnership, quasi-market value

The issues in FRB v DCA were wide ranging. The court appointed SJE had to deal with a variety of interests, as well as further complicating factors, one of which Cohen J was reduced to describing as an "unfortunate shenanigans"(at [84]).

One of the issues with which the SJE had to grapple was the appropriate level of minority discount that should be applied when valuing the husband's business interests. The expert did so by applying a £3.5 million discount to his valuation based upon a "market participant standard not an interested party standard", though explaining that this was a "lesser [minority] discount than would normally be the case to reflect the fact that the purchaser would find a ready market within the family".

Contrary to this, Cohen J found that no minority discount should attach to the valuation of the husband's business interests. This was because, in his view, it was "inconceivable that any outsider would either be permitted or be interested in acquiring it" and that "monies are transferred between family members at the drop of a hat and members of the family come in and out of companies and trusts whenever it is decided that it is useful". As such, Cohen J found that the interests were a "perfect example of [a] quasi-partnership".

Therefore, it appears that Cohen J considered it necessary to reflect in his assessment of the value of the husband's business interests several factors that were specific to the husband and the wider familial arrangements. That is, the value he assessed was not a Market Value, but more similar to an Equitable Value.

The judgment is not explicit about the basis of value that is applied or that used by the SJE. However it raises some interesting points. If an alternative standard of value, such as Equitable Value, has been adopted contrary to Mostyn J's Market Value guidance, then a discount based on a "market participant standard" should not have been applied. 

On the other hand, if the SJE assessed the Market Value, then factors specific to the parties, such as the familial arrangement which Cohen J did take into account, should have been disregarded.

The question, therefore, is whether this is an "exceptional case" referred to by Mostyn J in FS v SZ, such that a departure from the use of the present market value was justified? From our reading, it would seem that Cohen J considered the answer to be yes.


Identifying the appropriate basis of value is an important part of performing a reliable business valuation.

There are cases, such as FRB v DCA, where alternative assumptions, for example a hypothetical market transaction or a sale to family members, can have significant effects on the conclusions reached by the expert.

Where such issues are likely to be factors in the case, we consider that a helpful and pragmatic approach is for the court appointed expert to perform valuations on multiple bases, such as Market and Equitable Value, in order to highlight and explain such differences to the court. Similarly, where the parties consider, on the facts of the case, that alternative bases of value should be explored, it is helpful if the expert is made aware of those facts.

That is, whilst the expert can value assets under different bases, the ultimate, and far more difficult choice as to which is fairer will be a matter for the court to decide.

1 IVS 104: Bases of value. IVS Market Value is similar to Fair Value and Fair Market Value as defined by the IFRS and OECD, respectively.
2 IVS 104: Bases of value.
3 IVS 104: Bases of value.