MARITAL DISSOLUTION

While marital dissolution cases might not comprise the majority of a business appraiser's practice, they will likely comprise a disproportionately high percentage of the cases requiring expert testimony. Issues including but not limited to the standard of value and classification of property in divorce cases are decided on a state-to-state basis by statute, locality-by-locality rules, and court cases. As such, the business appraiser often assumes an expanded role that can include assisting with discovery and forensic accounting type services and often must have a closer interaction with legal counsel in providing services.

Business interests or assets subject to division in a divorce may include the following:

• Sole proprietorship
• Closely held stock
• General partnership interests
• Limited partnership interests
• Limited liability company interests
• Professional practice partnership
• Professional and practice goodwill
• Intangible assets such as patents, royalties, licenses, trade secrets, etc.
• Variety of other interests such as options, unregistered common shares, preferred shares, etc.
• Defined benefit pension plans
• Increases in value of otherwise separate property under certain circumstances

Standard of Value

Of critical importance, the valuation analyst must determine the applicable standard of value in the jurisdiction in which he or she is working. Standards of value often found in divorce actions in various states include, but are not limited to, fair market value and fair value. Fair market value is defined by some states, either by statute or case law, in a manner similar to the fair market value definition used for income tax purposes. Fair value, on the other hand, is defined by some states as the current value to the marital community in the hands of the present owner. The determination of the appropriate standard of value can impact the absence or presence of valuation discounts (minority and/or lack of marketability) and other factors.

Valuation Date(s)

The term valuation date can have several potential meanings depending upon the jurisdiction. The relevant dates on which the valuation analyst must value a business or business interest can include one or more of the following:

• Date of marriage
• Date of separation
• Date of filing
• Date of trial

If ambiguity or dispute exists regarding the proper valuation date(s), the valuation analyst at times must prepare valuations at several points in time, and be prepared to offer testimony to assist the trier of fact in determining the value as of the relevant date(s).

Property Identification and Classification

The marital estate, which is typically formed when a divorce is filed, represents the net assets that must be divided according to the laws of each specific state. Each state is typically classified as a community property state or an equitable distribution state. The identification of assets, the classification of assets, and the division of community property or the equitable distribution of property at times requires extensive assistance from the valuation analyst, in addition to providing valuation assistance. Forensic accounting can be required when disputes arise in jurisdictions where the source of funds used to acquire a particular asset determines its classification. ill some jurisdictions, in addition to determining value as of a particular point in time, the valuation analyst might be asked to analyze the factors that lead to changes in value (e.g., active/passive appreciation analysis) between one or more points in time.

Compensation

While determining reasonable market compensation is a typical issue that is encountered in valuing many closely held companies, the significance of determining reasonable market compensation is potentially heightened in a divorce action.

• In jurisdictions where adequacy of compensation determines whether there is any marital property component on otherwise separate property (e.g., whether marital estate adequately compensated for contributions of owner spouse), the amount determined as reasonable compensation can have both a business interest value impact and an asset classification and division impact.
• In jurisdictions where statute or case law limits spousal support to a proportion of reasonable market compensation to avoid "double counting," the determination of reasonable compensation impacts both the value of the business interest and the potential future spousal support.