A classic definition of “value” relates to the price at which a willing buyer and willing seller will agree to a transaction. This is commonly referred to as the fair market standard. When valuing a business, however, there may be several potential values, depending on the appraisal’s purpose and the relative interests of the parties involved.

Nuances relating to business valuations in divorce cases tend to be state specific. That’s because divorce laws -- and definitions of divorce value -- vary from state to state. It is, therefore, critical for a valuation expert to carefully consider how the definition of value (in terms of both case and statutory law) in a particular jurisdiction is applied for both fair market and divorce purposes.

Key Factors Affecting Valuation

Oftentimes, states may determine that a business’s value for divorce purposes is equal to the value to the spouse retaining it, which can be markedly different from what would otherwise be considered fair market value. Several factors may influence the valuation differences in a divorce situation.

• Change in ownership -- In a private sale, the purchase price of a business is ordinarily affected by the potential departure of an owner. However, if no change in ownership or management will occur, this may not be a factor in a divorce proceeding and, thus, would not impact the divorce value of a business.
  
  
• Tax consequences -- Capital gain or other taxes associated with a sale are considered in a fair market valuation. Tax consequences are usually ignored in a business valuation.
  
  
• Buy-sell agreements -- A fair market valuation generally considers buy-sell agreements. They do not affect the valuation of the business in a divorce situation.



• Treatment of future earnings -- In a fair market valuation context, the future earnings capacity of a business is generally a key determinant of the business’s overall value. For divorce purposes, however, future earnings attributable to the “operating spouse” may have a de minimis impact on the business’s value. It may be highly relevant, however, in determining the level of any maintenance or support that the operating spouse may be ordered to pay to the nonoperating spouse as part of the overall divorce decree or settlement.



• Acceptable valuation methods under state law -- Fair market valuations commonly reflect all generally accepted valuation methods. For divorce purposes, however, some valuation methods may not be allowed under a particular state’s laws for divorce valuations.

Conclusion

Appraising a business for the purposes of a divorce proceeding can be a challenging task. Valuation experts should be mindful of specific state-law factors that may dictate how to value a business in a divorce context. Our valuation professionals can help you sort through the key differences between fair market and divorce valuation in your particular situation.

This newsletter is provided by Somerset for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Steve Riddle, Tom Thieme, Rex Collins, Ken Stalcup or Doug Ayres of our Litigation, Valuation & Forensic Team. This document is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

Somerset CPAs, P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
info@somersetcpas.com

Print This Article