South Carolina Lawyer
Vol. 13, No. 2, Pg. 14.
Business valuation in family court
14Business valuation in family courtBy John 0. McDougall and George W. DuRant, CPA/ABV, ASAIt is easy for divorcing spouses to get sideways with one another when placing value on a small business or professional practice. Invariably, one spouse sees significant value while the other sees little or no value, and both can produce experts who will support their contrary views. How can this be?
It could be that both spouses are right, not equitably right or market value right, but right because value is one of those things that is largely determined based on perspective. This article focuses upon the family court's equitable perspective for valuing a business interest and demonstrates the court's flexibility in applying alternative valuation methodology in response to the overall economic dynamics of the marital dissolution.
Standard of value
Although not statutorily prescribed, many decisions of the family court and appellate courts have held that business interests should be valued from the perspective of fair market value. Many courts have defined fair market value as the cash price at which property would change hands between a willing buyer and seller, both being adequately informed of the relevant facts and neither being compelled to buy or sell. As clear-cut and reasonable as the fair market value standard may appear on its surface, it is a mistake to conclude the family court will adhere to that standard under all circumstances.
Universal application of the fair market value standard can produce questionable results in certain situations. For example, the court may question how a transaction-based view of value can be equitable in valuing a business interest that is clearly not going to be sold by the owner/spouse.
Sometimes it is more equitable for the court to focus upon value to the actual owner/spouse rather than value to a hypothetical market investor. Such a perspective on value is variously referred to as fair value or investment value. S.C. Code Ann. § 207-472 of South Carolina's Equitable Apportionment of Marital Property Act refers to it simply as "value," not specifying any particular universal standard. Obviously, no single standard could possibly encompass the multitude of considerations necessary for equitably dividing marital assets.
For example, the fact that a spouse will be awarded alimony may be a significant consideration in valuation of a business interest that is also the primary source of funds for payment of alimony. This issue, commonly referred to as double dipping, is not an issue that would be...