Divorce Courts Revalue Business Assets

The Law Offices of Jeremy W. Howe, LTD found this information about modern day divorce settlements to be relevant and important reading for anyone going through a divorce or settlement. Our office has used Barrett Evaluation Services in our legal and mediation practice on several occasions.

Roundup on Divorce Cases: Discounts, Valuation Dates, 

and the Economic Downturn

Is the severe economic downturn sufficient reason for a divorce court to revalue business assets? Does the statutory fair value standard preclude marketability and minority discounts in divorce? And what happens when a trial court combines the income and market approach to valuing a business?

The following four recent divorce cases answer these questions and more.


An unprecedented recession. In Mistretta v. Mistretta, 2010 WL 547149 (Fla. App. 1 Dist)(Feb. 18, 2010), the trial court valued the parties' restaurant at $845,000, based on expert appraisals conducted in 2007. Not long after the divorce was final, the husband filed a motion to reconsider. The economic recession caused the restaurant to lose nearly $57,700 in 2008, the husband claimed, and this "newly discovered evidence" merited a new trial and valuation. The trial court granted the motion, finding the 2007-2008 recession was "totally unforeseen."

The wife appealed, arguing that the economic down-turn was merely a change in circumstance, and the appellate court agreed. Business valuation is a forward-looking exercise, based on financial facts currently in existence as well as projected revenues and cash flows. "Economic recessions, like other vagaries in the business cycle, are contingencies appraisers must take into account in valuing a business," the court said. Although no valuation expert could have predicted the severe economic crisis, the trial court's order did not explain why, on rehearing, these same experts were more likely to accurately predict future economic conditions. "A cloudy crystal ball is no basis for a new trial," the court held, and it denied the motion.


Application of discounts and the statutory fair value standard. In Lemmen v. Lemmen, 2010 WL 454959 (Mich. App.)(Feb. 9, 2010), the husband owned a minority (25%) interest in a profitable, privately held oil and gas business with his brothers. The husband's expert valued his interest at $5.5 million; the wife's expert said it was worth $17.5 million. The trial court rejected the husband's valuation expert, finding that he incorrectly applied a discount rate to the company's dividend stream rather than net cash flows. This left testimony from the wife's expert, who declined to discount his $17.5 million value for lack of marketability or lack of control because the company enjoyed exceptionally strong cash flows, low debt, and a substantial cash base. Four years prior to the divorce, however, the same expert had valued the same company for one of the co-owners, applying a 25% minority discount and a 30% marketability discount. He did so only at the behest of the lawyers, the expert explained; it was not his general practice to discount the valuation of closely held stock. Nevertheless, the trial court applied the expert's prior discounts to his current valuation in divorce, and valued the husband's 25% interest at $11 million.

Both parties appealed. The appellate court deferred to the trial court's broad latitude to determine the value of stock in closely held corporations and accepted its valuations, including discounts. It also rejected the wife's arguments that the statutory fair value standard should apply to divorce cases. One judge on the panel dissented, which may set the case for an appeal to the state Supreme Court.


Emphasis on the correct date. In Goodwin v. Goodwin, 2010 WL 669244 (Tenn. App.)(Feb 25, 2010), the parties owned and operated a steel detailing business together. The husband's expert valued it at $385,000, excluding goodwill. Importantly, he valued the company as of the date the wife stopped working for the company as a bookkeeper, in 2007, and the husband took over sole operations.

By contrast, the wife's expert concluded that the steel business was worth $1.65 million, valued as of December 31, 2008-just months before the parties' trial. After considering the evidence and applicable law, the trial court adopted the value as calculated by the wife's expert, and the husband appealed.

Resolving such a wide range of values is "one of the main roles of a trial court," the appellate court said. A trial court is free to value a marital business within the range of evidence presented, and "that is exactly what (this) court did." Further, state law requires valuing a marital business as close as "reasonably possible" to the date of trial. Since the wife's expert valuation was 19 months closer to this date than the husband's, the wife's evidence was more in line with the law, and the appellate court confirmed the lower court's $1.65 million valuation.


A mix of valuation methods. In Rozenman v. Rozenman, 2010 WL 845924 (Ariz. App.)(March 11, 201O)(unpub.), the husband owned a separate cigar business, which appreciated during the marriage (2003-2008). As a start value, the trial court adopted a net asset valuation of the business at $177 ,000, not because an asset value is generally superior to an income or market approach, it said, but simply because it was the only evidence available. The parties each presented experts to value the business at the end of the marriage. The husband's expert relied on a net asset approach ($274,000); he also applied a market approach ($518,000) but said it wasn't "financially feasible."

By contrast, the wife's expert preferred the market approach because the comparables were good and the method adequately accounted for the business's strong, ongoing operations, its workforce, and goodwill. The trial court adopted the market approach by the husband's expert ($517,800) and the husband appealed, claiming the court should have adopted a net asset value to measure the business both before and after the marriage. Under the circumstances, however, the rationale of the trial court was reasonable, the appellate court held, especially given the lack of market analysis for the start-up business at the beginning of the marriage."



This newsletter is a publication of Barrett Valuation Services, Inc. This firm specializes in providing business valuation services for closely-held companies, primarily for estate planning and litigation support purposes. John E. Barrett, Jr. is a Certified Valuation Analyst and a member of the National Association of Certified Valuation Analysts (NACVA), a Certified Business Appraiser and a member of the Institute of Business Appraisers (IBA), and an associate member of the American Society of Appraisers (ASA). This firm subscribes to the Uniform Standards of Professional Appraisal Practice (USPAP) and has experience in providing valuation conclusions that are supportable and defensible. For further information on how BVS can serve your business valuation needs please call.

John E. Barrett, Jr., CPAIABV, CBA, CVA
Barrett Valuation Services, Inc.
989 Reservoir Avenue
Cranston, RI 02910
Phone: (401) 942-3900
Fax: (401) 942-3988

Children's Books for Divorcing Parents

Divorce Book Review by Nancy Johnson-Gallagher highlights a book for parents to read with children during the divorce process.

DIVORCE BOOK REVIEWS

Reviewer: Nancy Johnson-Gallagher. LICSW, Mediator

CHILDREN’S BOOKS

It’s Not Your Fault, Koko Bear: A Read Together Book For Parents and Young Children During Divorce

Vick Lansky: author of Divorce Book for Parents (1998)

This book has been a standard in the field for parents and counselors alike for years. Children whose parents are divorcing have their world shaken, and their parents abilities to parent are often shaken concurrently. The beauty of this book is that each issue is addressed for the child and there is complementary commentary on each page for the parents on how best to address their children’s feelings of loss, anger, self-blame and fear. Dependent upon the child’s maturity this book is best used for the child between the ages of two or three, to seven or eight.

Divorce Recovery

By Nancy Johnson-Gallagher, LICSW

Psychotherapist and Divorce Mediator

Is there such a thing as divorce recovery? We can all cite instances of friends, family or acquaintance who just never seem to get over their divorce. They continue to talk about, think about and, in general, complain about their divorce as if it happened yesterday, when in reality their divorce may have occurred years prior. It often becomes difficult to be around such people and we don’t know how to support or be a friend to them. Oftentimes we find ourselves pulling back from these people as we just don’t know what to say anymore.

However, we cannot ignore the realities of divorce in our society. In the United States the statistics are clear, but cold. Fifty percent of all marriages will end in divorce, with sixty percent of second marriages ending in divorce. Divorce affects many people beyond those divorcing spouses. Children especially are hit hard, with one-half of all American children witnessing the breakup of their parents’ marriage. Divorce is very stressful and is rated second only to the death of a spouse on the Social Readjustment Scale of stressful life events.

What can we do? Divorce makes everyone so uncomfortable, because if it happened to them, it COULD happen to us. Here’s what you can do:

1) Listen (without criticism or judgment). Divorce is a loss, just as death is a loss. There are a lot of emotions which must be acknowledged and talked about. Would you expect a friend to get over the death of a spouse or child in a few weeks time?? A divorce is different for everyone, but in general expect the roller coast of emotions to continue as long as 18 months to two years, dependent upon the length of the marriage.

2) Encourage mediation and alternatives to adversarial divorce when indicated. The hardest part of the process for kids (and everyone in general) is conflict. Kids whose parents engage in ongoing conflict have the most profound problems. Encourage professional counseling help if you have the opportunity.

3) Help with the physical tasks of readjustment-your friend or family member needs your support in transitioning from being married where there were two people to perform the necessities of daily living and child rearing to being single and “doing it all.” Moving, yard work, going back to school, learning to cook, finding baby-sitters, etc. can be overwhelming without support.

4) Suggest alternative support systems. Many organizations and websites offer divorce recovery workshops and materials to assist with the readjustment phase following divorce. There are also many self-help groups to assist with adjustments that must be made.

5) Offer Acceptance in general. Clearly, divorce is not going away. Don’t let your friends feel as if they are now “different.” Let them know you are there for them in all ways.