Creating Appropriate Strategies for Business Valuation in Divorce

In any dissolution of marriage in Connecticut, the assets and liabilities of the parties are divided through the process of equitable division. Generally, the court has wide discretion in the distribution of property and may assign all, or any portion, of the estate of one spouse to the other. Similarly, courts may evaluate the value of business interests in determining what resources may be available for other financial orders, such as alimony. When one or both spouses own or have an interest in a business, determining the value of the business may lead to complex and contentious disputes.

There is no set formula for courts to use in determining the value of a business. The litigants rely on business valuation experts to appraise the entity and present evidence for settlement negotiations, mediation or trial. The chosen method of valuation by a litigant may not fairly address the actual circumstances of the business interest. In other situations, opposing experts may battle before the court.

Business Valuation is a Fact-Based Inquiry

In Brooks v. Brooks, the trial court used the fair market value approach to determine the value of a litigant’s business interests for the purpose of calculating alimony. 121 Conn.App. 659 (2010). The fair-market approach seeks to identify the price that would likely result from fair negotiations between a seller and a willing buyer in the marketplace, often based on the sale price of similar businesses that have sold recently. All factors involving the business should be included in this type of valuation method.

The husband submitted evidence to the trial court of three shareholder agreements that included provisions restricting the transfer of stock. The agreements required that the shareholder sell the stock back to the respective corporations for book value. On appeal, the three-judge panel found error, not in the use if the fair-market method, but in the failure of the trial court to consider the marketability of the husband’s minority shareholdings when ultimately assigning values above book-value. In some situations, courts may first determine the full market value of an individual’s minority interest in a business and then discount the value after evaluating the circumstances, including marketability of the interest or the minority interest holder’s access to control of management of the entity. See, e.g., Siracusa v. Siracusa, 330 Conn.App. 560. fn 7.

Opposing Experts May Present Evidence of Value

In Turgeon v. Turgeon, each litigant presented evidence to the referee through their own expert witness. 190 Conn. 269 (1983). The wife relied on a business appraiser who evaluated the company using the capitalization of income approach, while the husband’s expert testified using the liquidation approach. The referee found the evidence that relied on the income approach persuasive.

On appeal, the husband argued on appeal that the referee erroneously used the income approach to value the business. The Connecticut Supreme Court disagreed making it clear that determining the value for a business is a factual inquiry. The trial court is given wide discretion to weigh the evidence and draw conclusions. Businesses may be valued using a wide range of methods. It is the evidence itself that the court weighs, not the method for determining value. The opinion says, “In assessing the value of … property … the trier arrives at his own conclusions by weighing the opinions of the appraisers, the claims of the parties, and his own general knowledge of the elements going to establish value, and then employs the most appropriate method of determining valuation.” Moreover, the judge is not required to even identify the valuation method used. See, Brooks v. Brooks.

There is No Standard Valuation Formula for Business Valuation

Methods for determining business value vary, depending on the unique facts and circumstances involved. Moreover, business appraisers may need to use a combination of methods to properly value a specific entity. It is critical to choose an appropriate strategy and business valuation professional to appraise the value of the business to achieve optimal results.

It is important to note that the court does not drive what evidence is presented if the case goes to trial. Closely held business interests cannot reasonably be through a standardized and inflexible formula. The appropriate business valuation experts may be brought in when needed to develop and present the evidence. Sophisticated matrimonial lawyers craft a strong, cohesive strategy that involves an evaluation of all of the fine details preparing for negotiations, mediation or trial in complex divorce litigation.