Business Valuation in Divorce
Testimony on the following are included in the court’s valuation of small business and professional practices:
- Fixed Assets
- Other assets such as properly aged accounts receivable, work in progress partially completed but not billed as a receivable, and work completed but not billed;
- Goodwill of the business as a going concern; and
When the business to be valued is co-owned, one way of valuing it is to look at the buy-sell agreement where the value of the interest is fixed in case of withdrawal or death. Before relying on the buy-sell agreement however, the court should consider the following:
- The proximity of the date of the agreement to the date of separation to ensure that the agreement was not entered into in contemplation of marital dissolution.
- The existence of an independent motive for entering into the buy-sell agreement, such as a desire to protect all partners against the effect of a partnership dissolution; and
- Whether the value resulting from the agreement’s purchase price formula is similar to the value produced by other approaches.
Goodwill in business refers to the continued support and patronage given by the public towards a business establishment in consideration of its reputation, position, and skill. It is beyond the mere value of stock, funds or property.
When it comes to valuation of the goodwill in a professional practice, the following factors are usually taken into consideration:
- Age of the practitioner
- Past demonstrated earning power
- Professional reputation in the community
- Comparative professional success
- Nature and duration of his or her business as a sole practitioner or member of a partnership or professional corporation.
There really is no hard and fast rule that the courts stick to in computing the goodwill of a professional practice. One method often used is called the excess earnings method, which compares the professional in question with that of a peer with average performance.
Closely Held Corporations
A closely held corporation does not trade its shares in the securities market and has only a few shareholders. As with goodwill, there is no single formula for computing the value of closely held corporations. The value of similar publicly held corporations cannot also be used as the sole basis because of the differences between a publicly held corporation and a privately held corporation.
In valuing the stock of a closely held corporation, the following should be considered according to Marriage of Micalizio (1988)::
- The nature of the business and history of the enterprise from its beginning
- The economic outlook in general and the condition and outlook of the specific industry in particular
- The book value of the stock and the financial condition of the business
- The earning capacity of the company
- The dividend-paying capacity
- Whether the enterprise has goodwill or other intangible value
- Sales of stock and the size of the block of stock to be valued
- The market price of stocks of corporation engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the counter.