Business Valuation in Divorce Case Law Compendium
At some point in a business valuation analystâ€™s career, an attorney or pro se party will call asking for a business valuation and perhaps even to retain your services. A good starting point is Business Valuation in Divorce: Case Law Compendium, 2nd ed. This edition is 584 pages long and provides a comprehensive court case digest that emphasizes similarities and differences in the treatment of goodwill (professional and personal), discounts, fair value, tax-affecting, and other significant issues. This is a must-have resource for those already practicing in this area and for those embarking in their valuation career.
As an attorney, I have handled my fair share of marital dissolutions. Back in the proverbial Stone Ageâ€”before the Internetâ€”it was difficult to find case law to provide the valuation expert. While judges understood that case law in this area was specific or unique to the state, those differences tended to be lost in the process of moving the case. It did not help if opposing counsel and their expert witness(es) talked in generalities and the ability to impeach or challenge them was limited.
With the advent of Daubert Tracker and additional resources, such as BVRâ€™s second edition of Business Valuation in Divorce Case Law Compendium, the challenging tasks described earlier are significantly streamlined. As an attorney, having a resource that summarizes leading cases in the states I practiced and that highlights the similarities and differences would have been the equivalent of hitting â€śLotto.â€ť
In the Introduction to this compendium, James Alerding, CPA/ABV, ASA, echoes the above sentiment:
I remember my first divorce case in the early 1990â€™s. I had just joined a small CPA firm in Indianapolis when one of my partners, a lifelong friend, dropped a divorce case valuation in my lap as he and his wife took off for Hawaii to do a little repair on their own marriage. For a second, I was petrified because trial was around the corner and I had not studied the case, never valued a business in my life, and never testified in court.
I immediately turned to Arthur Crandallâ€™s Valuation of Closely Held Businesses: A Cookbook Approach (With Sale or Assets Under $1,000,000) (published by the AICPA). The book was a lifeline because there wasnâ€™t much of a valuation community at that time and many reported cases didnâ€™t focus on valuation or other financial issues in the context of divorce.
The above has changed. NACVA/CTI now offer comprehensive training in this area of law, valuation professionals have helped educate attorneys, and the courts and judges have done their part by issuing thoughtful and instructive decisions. Alerding adds â€ś[o]ne of the best ways for professionals to keep up with legal developments is to consult BVRâ€™s Business Valuation in Divorce Case Law Compendium, 2nd edition.â€ť This edition contains a digest of notable divorce valuation cases, abstracted by BVRâ€™s legal analysts, and also enables buyers web access to the court opinions themselves.
While I limit my law practice to areas that do not include marital dissolution, I market valuation and litigation support services to attorneys; these services include valuation and lifestyle analysis. This is a very handy book for me! I work and live in Washington State. The Compendium includes a Court Case Summary Table that lists leading reported valuation cases. To use Washington State as an example, the Compendium includes In re Marriage of Monaghan (8/9/1995), where the court held that a non-compete covenant involving a dental practice was not a marital asset. Following a sale of the dental practice, the court held that if the apportionment was unfair because the assigned value was the majority of the business assets, then a more fair and objective apportionment was needed. The Compendium also includes more recent Washington State cases, such as In re Marriage of Gelman (2/21/2012), where the doctor had only a $1 interest in the practice according to the buy-sell agreement. The digest provides the reader with information about the issues on appeal and how those were resolved. This is the type of information that can assist me in a valuation or consulting expert engagement. In addition, it has information that can assist me with marketing. Whether you practice in California, Illinois, Ohio, New Jersey, New York, or Texas, there is plenty of information presented in a succinct manner.
In the area of discounts, the Compendium also shines. Again, BVR has included a Court Case Summary Table that enables one to select the jurisdiction and see a condensed summary of what the case stands for when cited. Again, using Washington State as an example, I found two cases, In the re Marriage of Gillespie (12/31/1997) and In re Marriage of Sims (1/23/2003). If you practice in South Dakota, you will find a concise summary of Fausch v. Fausch (5/18/2005) (marketability discount may be applied where there is no impending sale but is within the courtâ€™s discretion). If you practice in Massachusetts, you will find a summary of Caveney v. Caveney and Palmerino v. Palmerino (which cites the second post-Bernier court opinion).
The Compendium also includes twelve fair value cases. The number reflects the evolution of law and thought. Again, BVR has included a Court Case Summary. The cases discussed include: Grelier v. Grelier (Alabama), Crismon v. Crismon (Arkansas), In re Marriage of Thornhill (the appellate and Supreme Court cases from Colorado), Boyd v. Boyd (Texas), and In re Matter of Overbey (Washington State). Of course, this a sampling of those included.
The divorce and tax-affecting chapter is shorter, but very helpful. In this chapter, one can read condensed versions of the three Heller v. Heller (Ohio) opinions, Bernier v. Bernier (Massachusetts), and Balicki v. Balicki (Pennsylvania). The Court Case Summary Table enables the reader to see the similarities and differences between the jurisdictions. That is the type of information, if shared, that enables one to develop credibility and be considered for future litigation engagements.
The final chapter of the Compendium involves â€śOther Key Divorces Cases.â€ť Again, BVR provides a Court Case Summary Table. The following sampling will enable the reader to appreciate the wealth of information contained in the Compendium:
- In re Marriage of Price and Turkanis (5/11/2011( (California) (Five experts argue over using subsequent events in valuing software company)
- Colclasure v. Colclasure (11/20/2012) (Oklahoma) (Buyout agreement irrelevant to valuation of spouseâ€™s business interest)
- Cox v. Cox (1/25/2011) (Mississippi) (Joint experts in divorce; when should a spouse seek a second opinion?)
- Farmer v Farmer (9/8/2011) (Washington) (Court rejects â€śone-size-fits-allâ€ť rule for valuing stock options)
Although Business Valuation in Divorce Case Law Compendium does not include 2014 cases, it is a resource that should be part of every valuation expertâ€™s reference library. It will enable analysts to focus on the issues, understand the similarities and differences between the states, and prepare in assisting counsel, in addition to securing more engagements in 2015.
Roberto Castro, Esq., MST, MBA, CVA, CMEA, CPVA, is a managing member of Central Washington Appraisal, Economic & Forensics, LLC, www.cwa-appraisal.com, a machinery and equipment, business valuation, litigation support services firm in central Washington. In addition, he is a business broker with Murphy Business & Financial, LLC, www.murphybusiness.com/centralwashington, and managing member of the Law Office of Roberto Castro, PLLC, www.rcastrolaw.com, a central Washington state law firm focused on business, bankruptcy, estate, and succession and exit planning. Mr. Castro can be reached at either RobertoC1@NACVA.com or (509) 679-3668.