Divorce is one of the most common reasons for obtaining a business valuation, and has led to many court decisions. Throughout the United States, there are a myriad of laws and case law, and making sense of this patchwork quilt is difficult at best. When developing a valuation for a marital dissolution, here are some issues that should be considered.
Equity Comes First
Divorce cases are not heard in federal courts and are subject to the laws of particular states or jurisdictions, and family law courts are courts of equity. This means that the judge might determine a value for a business interest based on the needs of splitting the entire marital estate and not specifically on the value determined by one or the other of the experts.
The rules are complex and depend not just on state law, but on whether the business is a sole proprietorship, partnership, S corporation, C corporation or LLC.
A Little Forethought Offers Big Payback
The attorney and valuation expert must agree on some concepts at the beginning so they know they are on the same page. Some of the questions they should ask themselves are:
- For the jurisdiction in which the case is being tried, what is the appropriate standard of value?
- How should personal goodwill be handled?
- What type of report would best suit the case at hand?
- Are there other unique issues regarding how a business is to be valued in the jurisdiction?
Comprehensive Reports Help Judges Understand Valuation Issues
Particular attention should be paid to comprehensive written appraisal reports. They can be especially important in divorce cases, as that information assists the judge in determining the rationale for the expert’s conclusion of value. It also provides a clear record for appeal.
Defining the Standard of Value
The standard of value is also important in a divorce case. Many states claim to have a fair market value standard in divorce cases. But watch out for other standards of value disguised as fair market value. Often, the statutory definition of the standard of value would more aptly be referred to as “fair market value except.” For example, a particular state or jurisdiction might exclude transferrable personal goodwill, might not allow tax affecting in determining the income approach value, and might require that a hypothetical sale of the business not be taken into account.
Divorce cases are even more contentious and complicated when they include an interest in a privately held business. It’s important for the attorney and the valuation expert to be knowledgeable about the important issues in the jurisdiction where the matter is being heard. Together, the team can help divorcing spouses achieve an equitable division of the marital estate. The team at Filler & Associates can give more information on valuation experts.