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

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.