Collaborative Challenges – Valuing a Business
One of the most challenging issues in any divorce case, whether it be negotiation, litigation, or collaboration, is placing a dollar value on a business. We find this challenge in a wide variety of circumstances, from the small business that has been operated by an individual or several individuals for a long period of time, to a medical practice, to a law firm. In most cases, the person or persons who have worked hard to establish the business would like to keep it with a minimal amount paid to the other spouse for his or her share. It is further complicated by occasions where there are no other assets to divide and, therefore, no other way to pay out the value of the company.
In court, it is necessary for a judge to classify, value, and then make a ruling on distribution of assets under what is called Equitable Distribution. This can create tremendous challenges and frustrations, especially when the business is the only major asset to divide. Courts use various ways to value a business, including:
1. Income or earnings approach;
2. Asset or net-asset approach; or
3. Market or contract approach.
An income or earnings approach usually involves calculating a company’s future earnings based on current and historical trends, reducing those future earnings to a “present value” based on an expected rate of return, sometimes called a discount rate or a capitalization rate.
An asset approach (sometimes called “book value”) is based on information gleaned on the value of the company’s assets shown on its books.
A market based approach attempts to determine what a willing buyer would pay for the company, this can be very difficult, especially if a person’s interest amounts to a minority share in a closely-held company.
Courts will frequently value the company based on its “intrinsic value”, that is, what it is worth to the person holding an interest in it; this can sometimes be greater than what the company would actually sell for if marketed.
If contestants are in court, they often hire dueling experts, at considerable expenses, to inform the court on different values for their companies. There can be a wide disparity in the values advanced by these experts. For example, in Brake v. Brake, 14 Va. App. UNP 1204134 (2014) a court was required to determine the valuation and division of the husband’s 10% interest in his law firm. One expert testified that the value was $20,000.00; the other expert testified that the value was $308,439.00. These discrepancies are not unusual, and generate great uncertainty for litigants.
The collaborative approach allows the parties to hire one expert to provide information from which a possible resolution can be determined. In the collaborative approach, the expert is working for both parties and so bias is potentially eliminated. Using the neutral will save the parties considerable money that may be available for other needs of the family. Collaboration can even allow parties to agree on a value by themselves, without use of an appraiser, or even determine a way they may share the asset in some other fashion.
Interestingly enough, in the Brake case, the trial court allowed the husband to pay the wife either in a lump sum or by periodic payments, plus interest. The Court of Appeals affirmed that approach and it is no doubt another option in the collaborative process by which one party can pay the other for an interest in a business.
Please call me (434) 977-7977 if you wish to discuss this or other family law issues.
David Toscano practices in the areas of family law, collaborative law, estate planning and real estate. David represents the 57th District (Charlottesville-Albemarle) and is the Democratic Leader in the Virginia House Delegates.