Often in a business valuation for a divorce, the interest being valued is not being sold. instead of being sold it is being awarded to one spouse. Commonly the standard of value urged upon the Court is a Fair Value Standard. Under the fair value standard, discounts for lack of marketability or lack of control are eliminated. Elimination of these discounts can make a very substantial difference in the value assigned to the interest in a business or professional practice. It has been found that ‘the value to be ascribed to shares in a family company must be a realistic one. This value should be based upon the worth of the shares to the party himself or herself.’ Harrison and Harrison (1996)
Valuation Approach for Divorce Valuations
When conducting a business valuation for a divorce, the Future Maintainable Earnings methodology is often used. With this approach, we are determining the value of an income stream. The methodology determines the value of the business and not the price at which it may change hands. The methodology makes no assumptions as to the price on sale. It represents the present value of the future income flows from the business. Value and price are often not the same, as price may reflect other benefits that ownership of the business may confer. These benefits may be such as synergies with existing businesses, a job, the desire to be self employed, lifestyle decisions etc.
Single Expert Witness
With Family Law Valuation many business valuations are prepared on a single expert witness basis. This reduces the overall cost to the parties as well as reduces the time in court.
There are a number of factors to be taken into consideration when conducting family court valuations. It is for this reason that methodologies vary greatly depending on the type of business being valued.
It is important to distinguish between business goodwill and personal goodwill.