Why `Fair Market Valuations' are Inappropirate for Employee-Owned Firms and Partnerships

TL;DR

This paper argues that traditional fair market valuation methods are unsuitable for employee-owned firms and partnerships because they incorrectly assume future residuals accrue to current shareholders, ignoring the unique property rights structure.

Contribution

It highlights the inappropriateness of standard valuation formulas for employee-owned firms and partnerships due to their distinct residual claimants and property rights.

Findings

Traditional valuation formulas assume residuals accrue to current shareholders.

In employee-owned firms, future residuals belong to future worker-members.

Standard methods lead to inaccurate valuations for these firms.

Abstract

The usual formulas for the fair market valuation of a firm at time $t$ include the profits accruing to the shares at time $t$ from the use of wage or salaried labor in the future. But in employee-owned firms or partnerships, the future worker-members or partners are the residual claimants at those future times, so in those cases, the future residuals do not accrue to the current shareholder/residual-claimants. Hence any `fair market valuation' of an employee-owned firm or partnership that assumes those future residuals accrue to the current shareholder/residual-claimants is inappropriate. Keywords: fair market valuations, residual claimants, property rights, personal rights, Miller-Modigliani valuations.