This article goes into further depth on valuations for divorce purposes, particularly the 2007 landmark Mass. SJC case of Bernier v. Bernier. You can read the brief overview and why George & Company should be your expert for divorce valuation here.
Fair Value vs. Fair Market Value
Does the owner of a business in a divorce case have any potential intention of actually selling the business? Most business appraisals assume a contemplated sale of the business stock or assets to an arm’s length buyer who is in possession of the relevant facts and not under compulsion to act. The Bernier case changes this hypotheses by stating that a different standard of value, Fair Value, must be opined if the owner of the business in question is not likely to place it for sale. Fair Value disallows the appraiser from applying premiums and discounts for lack of marketability, liquidity and amongst others, key man. These discounts are commonly used in other business valuation cases.
In our engagement to opine to a business value in dissolution of Marriage case, we will ask the retaining attorney if they want us to apply the SJC’s ruling in the instant case. Our experience tells us that each lawyer has a varied understanding of this complex and confusing case. We are happy to offer our professional opinion as it applies to each individual case. While we strive to perform within the standards of the Washington, DC based Appraisal Institute and its practices as promulgated by the Uniform Standards of Professional Appraisal Practices (USPAP). Each client’s needs are different. Budgets vary; some reports are for mediation, others for expert testimony in the divorce case and others for the trier of fact. Accordingly, George & Company and Central Business Brokers have custom tailored our reports to the needs of the client and their attorneys. For a multitude of reasons, we are asked to provide a letter opinion of value. The valuation sets forth the main issues at hand and reduces the report to a summary opinion where the work sheets are maintained in our files.
Our most common report is a calculation report that summarizes the issues and details the conclusions within the text of the actual report. A calculation report is considered under USPAP a limited summary report. This report is an economically affordable suitable for all forms of uses including divorce business valuation, estate business valuation, shareholder/stockholder business appraisal, estate business value, economic distress and recovery valuations, purchase and sale valuations, buyer representation appraisals, etc.
For a more comprehensive appraisal, we provide a full narrative report that details all the various aspects of how we arrived at our opinion of value. All reports, unless otherwise stated, are stated in cash or equivalents and in fee simple. For divorce purposes, our reports will typically reflect the Bernier decision.
How Bernier Affect Taxes
The SJC rejected the fact that a business should be taxed at a regular (C corp.) rate. In essence, the court ruled that the value arrived at should be taxed at the owner’s applicable tax rate if a pass through entity. This ruling has several implications. The business value is stated in Fair Value, typically a higher value than FMV due to the lack of discounts for liquidity and key man issues. Business valuation experts have argued for decades relative to whether value should be stated based on pre-tax or after tax income. While, most buyers will pay a multiple of EBITDA; earnings BEFORE interest, taxes, depreciation and amortization, there exists the death and taxes presumption that no one is exempt and thereby all value should be based on after tax income. The common theory being that the acquiring party will have different tax, depreciation and cost of financing burdens than the subject company. It is interesting to note that the SJC stated that if the business is not to be sold, FV must be used. In addition however it ruled that despite the fact the business will not be sold the value should be stated as if it were sold and subsequently tax affected. This treatment can reduce the ultimate value of the company by 0% to as much as 64% for a Massachusetts C Corporation. For this reason George & Company and Central Business Brokers, along with many business appraisal and valuation practitioners elect to treat each assignment on an individual basis.
Valuation Legal Experts
Based on our brief outline above, it is obvious that we have given significant fodder to opposing counsel under cross-examination. Bernier has added to the confusion that can be introduced to influence the judge or jury. George & Company and Central Business Brokers make their position in each case very clear. We answer questions in a way the trier of fact can understand without introducing mumble and jumble of the professional that often confuses rather than informs. We are business valuators that do not use any sort of canned business valuation software but rather do the work in our heads and reduce it to writing ourselves with little fluff. The result is an expert witness that understands his assignment and typically does not need to refer to notes while on the witness stand. George & Company and Central Business Brokers business valuation experts know what they are talking about because they have done the work themselves. This means a more credible witness.
Market Approach to Valuation
Of course, you want an expert business appraiser that will convince the judge or jury of his opinion of value. The market approach to business valuation and appraisal can be the mortar in the cement to make a concrete case. Most people are familiar with real estate appraisers using a comparable market analysis in appraising residential and commercial property. We like the market approach in business valuation jury trials where the jurors may not be familiar with the complex approaches to business appraisal. George & Company and Central Business Brokers uses the market approach in many ways that produce very credible reports. We are one 18 worldwide contributors to the annual publication BizCompsã, an annual compilation of privately held business sales. We are also members of the acclaimed Pratt’s Stats “Hall of Fame” for privately held sold business data. In addition, your George & Company and Central Business Broker experts are in the trenches every day selling businesses that he or she has previously appraised. Why is this important? If we use the income approach to arrive at the business value, we can measure our conclusions with the actual database of sold businesses as a sanity check. There are few other appraisers in divorce business appraisal cases that have this ability. We will also use sold data to show empirical statistics relative to multiples of valuation pricing to both gross and net income. Many CPA’s who do business valuation will arrive with capitalization rates similar to real estate (8-12%) Empirical data by industry will show these rates to be flawed for small to medium sized businesses.
If you’re looking for impartial experts who can make the appraisal of your business clear for both sides of the courtroom, contact us today.