divorce and business...
TRANSCRIPT
![Page 1: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/1.jpg)
Divorce and Business Valuations Navigating Complex Valuation Issues and Methodologies and Analyzing Valuation Impact on Support
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
THURSDAY, MARCH 15, 2012
Presenting a live 90-minute webinar with interactive Q&A
Gunnar J. Gitlin, Atty, The Gitlin Law Firm, Woodstock, Ill.
Martin S. Varon, Principal, Alternative Resolution Methods, Atlanta
Sarah McCormack, Partner, Kessler & Solomiany, Atlanta
Daniel E. Clement, Atty, Clement Law, New York
![Page 2: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/2.jpg)
Conference Materials
If you have not printed the conference materials for this program, please complete the following steps:
• Click on the + sign next to “Conference Materials” in the middle of the left-hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
![Page 3: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/3.jpg)
Continuing Education Credits
For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:
• Close the notification box
• In the chat box, type (1) your company name and (2) the number of attendees at your location
• Click the SEND button beside the box
FOR LIVE EVENT ONLY
![Page 4: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/4.jpg)
Tips for Optimal Quality
Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-866-961-9091 and enter your PIN -when prompted. Otherwise, please send us a chat or e-mail [email protected] immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.
![Page 5: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/5.jpg)
VALUATION DISCOUNTS AND ENTERPRISE VERSUS
PERSONAL GOODWILL Gunnar J. Gitlin, Gitlin Law
Firm, Woodstock, IL 815-338-9401
[email protected] www.GitlinLawFirm.com
![Page 6: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/6.jpg)
In divorce valuations, often a significant issue is not value of the business, itself, but the discounts applied to the value.
The main discounts to be reviewed are: Minority Interest (Control Premium) and Lack of Marketability.
6
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 7: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/7.jpg)
Will learn how to analyze all of the key discounts and premiums: Includes critical issues:
Key Revenue Rulings Discounts and Premiums 101/102.
Control Premiums/Minority Interest Discounts Lack of Marketability Discounts
7
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 8: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/8.jpg)
Revenue Ruling 59-60: Little discussion of discounts. Does address key person discount issue – discussed later.
Revenue Ruling 77-287: Early Revenue Ruling addressing lack of marketability discounts.
Revenue Ruling 93-12: Revenue Ruling doing away with so called “family attribution doctrine” previously promoted by I.R.S. Allows application of minority interest discounts to
partial transfers even when a family owns overall control of a closely-held business.
8
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 9: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/9.jpg)
Revenue Ruling 59-60: Little discussion of discounts. Does address key person discount issue – discussed later.
Revenue Ruling 77-287: Early Revenue Ruling addressing lack of marketability discounts.
Revenue Ruling 93-12: Revenue Ruling doing away with so called “family attribution doctrine” previously promoted by I.R.S. Allows application of minority interest discounts to
partial transfers even when a family owns overall control of a closely-held business.
9
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 10: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/10.jpg)
Key Concept is relationship between nature of ownership interest from
marketable, controlling interest to non-controlling, non-marketable interest upon
valuation discount.
10
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 11: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/11.jpg)
STRATEGIC VALUE
CONTROL VALUE
FREELY TRADED VALUE ORMARKETABLE,
NON-CONTROLLING
NON-MARKETABLE,NON-CONTROLLING
Strategic Premium/Merger Economics
Lack of Control Discount
Lack of Marketability Discount
Premium for Control
Obtain indirectly by reference tocontrol values via strategic premium
Obtain indirectly by reference to freelytraded values via control premium
Obtain indirectly by reference to controlvalues via lack of control discount
Obtain indirectly by reference to freelytraded values via lack of marketability
discount
Source: Based on Z. Christopher Mercer, "Understanding and Quantifying Control Premiums: The Value of Control vs. Synergies of StrategicAdvantages, Part II," The Journal of Business Valuation, p.51.
11
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 12: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/12.jpg)
Type of Ownership Interest
Example
Valuation Premium / Discount
Illustrative Premium / Discount %
Illustrative Impact
on Value
Marketable Control
100% interest for sale to a strategic buyer
Synergistic Premium (Not FMV)
+15%
$115
Marketable Control
100% interest for sale to any willing buyer
No Discount or Premium
None
$100
Marketable Noncontrol
Minority interest in a publicly traded company
Discount for Lack of Control
-20%
$ 80
Nonmarketable Noncontrol
Minority interest in a private company
Discounts for Lack of Control and Marketability
-30%
$ 56
12
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 13: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/13.jpg)
Control Premium: Additional consideration investor would pay over a marketable, minority equity value (publicly traded stock prices) to own a controlling interest in the common stock of a company. Premium may include components for control and synergy.
Lack of Control Discount (a.k.a. Minority Discount): 50% interest may have lack of control discount although not a minority interest. Neither control nor minority position.
13
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 14: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/14.jpg)
“There are 51 shares ... that are worth $250,000. There are 49 shares that are not worth a ----.” (See Humphrys v. Winous Co., 133 N.E.2d 780, 783 (Ohio Sup. Ct. 1956) quoting from John H. Doyle, speech before Ohio State Bar Association, July 1893).
14
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 15: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/15.jpg)
Control versus minority interest not an all or nothing concept.
Examples: Set corporate policy; Appoint management; Determine compensation for management; Determine perqs of management; Acquire or liquidate corporate assets; Declare and pay dividends; etc.
15
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 16: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/16.jpg)
100% Control. Slightly Less than 100% Control: Minority interest may be a nuisance. Less than 80% control: Cannot consolidate financial statements for tax
purposes. Two-Third Interest: About one-third of the states require more than a
50% (plus one share) vote to approve certain major corporation actions (see chart in written materials). This may be known as super-majority. The various states’ statutory positions on this issue will have an affect on the degree of control.
50% Interest: This interest is neither a control nor minority position. Such a shareholder has the power prevent actions but generally does not have the authority to control action of the company.
Swing Vote - Minority block: This depends upon the distribution of the stock. The relationship between the persons owning other stock may have a value on the swing vote. Example: 1/3 int. to three owners subject to lesser discount.
16
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 17: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/17.jpg)
Attempt to indirectly examine the range of premiums buyers pay for a controlling interest in a public company.
Two Sources of Data – Compare public market trading prices before announcement of a merger or acquisition to the merger or acquisition price: Mergerstat Review: Publishes annual average control premiums for about
50 broad industry groups. These are averages and exclude negative premiums (takeovers at discounts from previous publicly traded prices).
Mergerstat/Shannon Pratt’s Control Premium Study
17
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 18: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/18.jpg)
Mergerstat Review: Publishes annual average control premiums for
about 50 broad industry groups. These are averages and exclude negative premiums (takeovers at discounts from previous publicly traded prices).
Mergerstat/Shannon Pratt’s Control Premium Study Online database: all takeovers of public companies
resulting in over 50% ownership since 1998. One feature of this publication is that the transactions are labeled as Financial, Horizontal Integration, Vertical Integration or Conglomerate. May help in assessing the degree of synergy reflected in the control premium.
18
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 19: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/19.jpg)
Year
Average Control
Premium
Median Control
Premium
Calculated Minority Discount
2007 31.5% 24.7% 19.8%
2006 31.5% 23.1% 18.8%
2005 34.5% 24.1% 19.4%
2004 30.7% 23.4% 19.0%
2003 62.3% 31.6% 24.0%
19
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 20: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/20.jpg)
Exclusion of Negative Premiums from Averages: Effect is to exaggerate averages
References to Averages Versus Mediums: Averages distorted by a few very high premiums
paid. Control Transactions May Consider
Investment Value: a/k/a “strategic,” “acquisition,” or “synergistic”
value
20
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 21: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/21.jpg)
Normalization process may include two types of adjustments: Adjustments which may take into consideration
elements of control Other adjustments.
Often valuator may make adjustments to business int. only a control owner could make and then also apply minority interest discount.
21
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 22: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/22.jpg)
Illiquidity Discounts: Apply to Control Interest.
Lack of Marketability Discounts: Apply to Minority Interest.
Terms generally measure same thing but the amount of discount significantly differs. Much greater discounts for lack of marketability for
a minority interest.
22
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 23: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/23.jpg)
Two Types of Studies: Early Restricted Stock Studies and Later Pre-IPO Studies
Restricted Stock Studies Usually restricted for period of two years.
Restricted stock may occur in various settings: Closely-held Company’s Sale of Unregistered Shares:
Often done to raise capital. Shares Issued When Company Acquired: When this is
done the stock issued is often unregistered and is subject to restrictions on its sale.
Unregistered IPO Shares: Often underwriters of an IPO request that some of the stock not be registered at the time of the public offering.
23
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 24: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/24.jpg)
Positives Since marketability is the only difference between
restricted stock and freely traded stock, studies of such stocks are often used to measure the lack of a marketability discount to be applied when valuating a closely-held corporation.
Negatives Because the short time period in which the
restrictions on such stock expire, shares of closely-held stock are expected to require a higher marketability discount compared to the restricted stock of a publicly traded company.
24
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 25: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/25.jpg)
Study Years Avg. Discount
SEC 1966-1969 25.8%
Gelman 1968-1970 33.0% Trout 1968-1972 33.5% Moroney n/a 35.6% Maher 1969-1973 35.4% Std Research 1978-1982 45.0% Willamette Mgmt 1981-1984 31.2% Silber 1981-1988 33.8% FMV Opinions April 1992 23.0% Mgmt Planning 1980-1996 27.1% Johnson 1991-1995 20.0% Columbia Fin 1996- Apr 1997 21.0% Columbia Fin May 1997-1998 13.0% LiquiStat Database Regularly
Updated “Almost fits into
separate category.” 25
![Page 26: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/26.jpg)
Beware of Averages Redux: While average discounts in the restricted stock studies are
consistent, virtually all of the studies have a huge degree of variability with the highest discounts being more than 80 percent or 90 percent and with the smallest discounts actually representing a positive number, i.e., a premium.
Studies Show Greater Discounts for Smaller Businesses: Management Planning Study: Median 32.7% under 10M
but 17.0% for larger businesses. New Studies Not Likely:
Due to one year restriction.
26
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 27: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/27.jpg)
Example Period: April 2005 to January 2007: Average Holder Period Shares Sold in Secondary
market: 138 days. Shorter than in Restricted Stock Studies. Surprisingly: Significantly higher discounts. Average and Median: 32.8% and 34.6%
27
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 28: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/28.jpg)
Importance of Studies: Benchmark to determine the difference between the
value of stock in private transactions before going public relative to the market prices following the initial public offers.
Two significant series of studies: Emory Pre-IPO Studies Willamette Management Assoc. Pre-IPO Studies
28
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 29: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/29.jpg)
Study Years
# of Transactions
Average Discount
1997-2000 266 50% 1995-1997 84 43% 1994-1995 45 45% 1991-1993 49 45% 1990-1992 30 34% 1989-1990 17 46% 1987-1989 21 38% 1985-1986 19 43% 1980-1981 12 59% All Studies 543 46%
29
![Page 30: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/30.jpg)
Positives: Studies show higher discounts than restricted stock
studies: better measures effect of marketability. Those with restricted stock know restrictions will expire at end of term.
Negatives: Pre-IPO studies likely measure more than only a
discount for marketability and he correctly suggests that there are multiple enhancements experienced by a company going public
30
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 31: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/31.jpg)
Mercer’s Position: “Comparing pre-IPO discounts with marketability
discounts is like comparing apples to oranges.” See, Christopher Mercer, QUANTIFYING MARKETABILITY DISCOUNTS (1997) pp. 89-91.
Qualitative Marketability Discount Model. Model attempts to give more objective indication as
to amounts of lack of marketability discounts.
31
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 32: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/32.jpg)
Amount of Discount: Discount is significantly less in scope (e.g., 10%
versus 35%). For this reason appraisers are beginning to use the term illiquidity discount.
Common Mistake: Many valuation reports apply significant lack of
marketability discount to controlling interest based upon these studies – which is not proper.
32
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 33: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/33.jpg)
Over half the value of a business can be “lost” in the discounting process.
Be aware of when discounts should be applied and when they are not appropriate.
Do not assume the valuator has detailed knowledge of the strengths and weaknesses of discount studies or has properly used them.
If you can’t understand how or why a discount was applied in your client’s valuation report, then neither will the judge.
33
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 34: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/34.jpg)
The Bible: Pratt: Valuing a Business 5th Edition, 2008, Part IV
BVR’s Guide to Discounts for Lack of Marketability, 2009:
34
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 35: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/35.jpg)
Many States: Personal Goodwill Not a Marital Asset: See:
http://www.bvresources.com/FreeDownloads/Goodwillhunting.pdf
Common Mistake: Even in states where no distinction, the failure to try
to skin the cat via another way: e.g., key person discount.
35
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 36: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/36.jpg)
Two Types of Double Dipping: Property Standards Themselves; Property Versus Maintenance Standards; Other reasons
Personal Goodwill Defined: If goodwill depends on the continued presence of a
particular individual, the theory is that the goodwill is not marketable distinct from the personal. This goodwill is essentially the future earnings of the business owning spouse.
36
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 37: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/37.jpg)
Illinois case: IRMO Alexander, per Pratt’s Valuing a Business. 368 Ill. App. 3d 192 (Fifth Dist., 2006). Novel Method: Multiattribute Utility Theory or
Model (MUT or MUM). Several steps: Objective; Alternatives: Range of Percentages that define the
choices. Attributes: Element of Goodwill that valuator assigns a
value: Examples: Personal reputation, business location. Creation and Categories up to Discretion of Valuator
37
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 38: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/38.jpg)
The Onsite Interview’s Importance. Variations in Personal Goodwill Ranges.
Examples: 90% Case: But could other individual take over, etc.
Key Issue: Could you bring in another person at a given salary
to replace the business owning spouse and still maintain the current level or profitability.
Business Valuation and Henry David Thoreau: Simplify. Always simplify. The Challenge. To simplify, you must first
understand. 38
Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL:
www.GitlinLawFirm.com
![Page 39: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/39.jpg)
Presenter
Martin S. Varon Alternative Resolution Methods, Inc.
Smyrna, GA
770-801-7292 [email protected]
39
![Page 40: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/40.jpg)
Acquiring business through gift, inheritance, or
reorganization
40
![Page 41: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/41.jpg)
Spouse owned business prior to marriage or received it by gift or inheritance and is now claiming a separate property interest
41
![Page 42: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/42.jpg)
Separate Property Argument • Business has a value of $1,000,000 as of date of
marriage or at time of gift/inheritance • Owner argues this is separate property and
should not be considered as an asset for equitable distribution
• Owner maintains ownership in a separate account and does not commingle profit distributions (dividends) with any jointly held investments
42
![Page 43: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/43.jpg)
During the Marriage
• Business grows significantly during the course of the marriage
• Both family attorneys agree to retain one valuation expert to determine the value of the entity as of today
• Expert prepares a valuation report and concludes that business is currently worth $5,000,000
43
![Page 44: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/44.jpg)
Conflicting Arguments
• Business owner argues that business was received by gift or inheritance (or was owned before the marriage) and is thus separate property not subject to an equitable interest
• Spouse argues that most of the growth occurred during the course of the marriage and thus she is entitled to her/his equitable share
44
![Page 45: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/45.jpg)
Opposing Arguments • If owner of the business never worked in the
company, had absolutely nothing to do with the company’s growth, and continued to hold the investment in a separate account-it would appear that the growth was the result of “market forces” and he/she may prevail
• On the other hand, if the owner was the “rain maker” for this company, and the growth in the company was the direct result of “his/her efforts” that occurred during the course of the marriage, it would appear that the spouse may prevail
• See Halpern v. Halpern, 352 SE 2nd, 753
45
![Page 46: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/46.jpg)
What if Our Facts Are Somewhat in the Middle?
• Business Owner Worked in the business • Business Owner worked in the business, but
was one of a few individuals that created the increase in growth
• Business owner worked in the business, maintained an administrative position, and was paid a reasonable salary
• Business owner worked in the business, held a sales position, brought in new clients, but was clearly not “The Rainmaker”
46
![Page 47: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/47.jpg)
Active v. Passive Appreciation • See Mayhew v. Mayhew, 205 W. Va. 490 (1990) where
the Supreme Court of West Virginia applies a five step test
• “Active participation of separate property of either of the parties to a marriage, or that increase which ‘results from
** (A) an expenditure of funds which are marital property…or
** (B) work performed by either or both of the parties during the marriage
is marital property which is subject to equitable distribution”
47
![Page 48: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/48.jpg)
“One of Five”
• See Decker v. Decker, 435 SE 2nd 407 where a Virginia court found that “20% of appreciation was attributable to Mr. Decker…He was one of five key executives, but the ‘first among equals’
• Court pointed out that there was a $10 million life insurance policy on Mr. Decker’s life owned by the corporation, and no other executive was insured for more than $3 million
48
![Page 49: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/49.jpg)
“One of Four” • See Herron v. Herron, 2004 Ohio 5765 - Ohio: Court of
Appeals, 3rd Appellate Dist. 2004 • An Ohio Court of Appeals defined “passive income as
income acquired as a result of the labor, monetary, or in-kind contribution of either spouse…there was extensive testimony that Ms. Herron was one of four key executives running the company, that the complexity of her position increased as the company grew, her participation allowed her brothers to focus on their areas…the Court found Ms. Herron personally contributed to 25% of the overall growth of the company.”
49
![Page 50: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/50.jpg)
One of the Rainmakers
• See Ellis v. Ellis, 235 AD 2d 1002 where the New York Appellate Division found that “since Mr. Ellis personally generated 20% of total sales, 20% of the total appreciation of his stock constituted marital property”
50
![Page 51: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/51.jpg)
How may an expert help? If your client is not the only person generating Sales:
• analyze volume of sales over the last few years by sales person • analyze gross profit margins on each sales person’s accounts • review the financial statements and FOOTNOTES- • review Board of Directors minutes for additional insights • interview the company’s independent CPA • what if the owner is being paid a reasonable salary or an amount in
excess? Has the spouse already received her equitable share during the marriage?
51
![Page 52: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/52.jpg)
Presenter
Martin S. Varon Alternative Resolution Methods, Inc.
Smyrna, GA
770-801-7292 [email protected]
![Page 53: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/53.jpg)
WHAT IS THE DOUBLE DIP?
53
![Page 54: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/54.jpg)
Let’s assume the cash flow generated from spouse’s closely
held business is as follows:
54
![Page 55: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/55.jpg)
Sales Less: Cost of Goods Gross Profit Less: Operating Expenses Less: Owner’s Salary Net Income/Net Cash Flow
Income Statement
55
$2,000,000 ($1,200,000)
$800,000
($50,000) ($750,000)
$0
![Page 56: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/56.jpg)
Owner of the business claims there is very little if any value because the company is not
generating any cash flow
56
![Page 57: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/57.jpg)
•Valuation Expert analyzes subject company and concludes that owner is paying him/herself an excessive (unreasonable) salary * Expert analyzes compensation data bases for subject industry, size of this company, and geographical location of this company * Expert concludes that if the owner sold his/her company to a hypothetical willing and able buyer in an arm’s length transaction, he/she will have to hire someone to do the ex-owner’s job * Based upon the appropriate data bases, expert concludes that a reasonable salary for this job is $400,000 * Valuation expert restructures the net cash flow analysis as follows:
Valuation Expert’s Findings
57
![Page 58: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/58.jpg)
Sales Less: Cost of Goods Gross Profit Less: Operating Expenses Less: Salary for Owner’s Job Net Income/Net Cash Flow
Income Statement-As Reported & As Revised
58
As Reported $2,000,000 ($1,200,000)
$800,000 ($50,000) ($750,000)
$0
As Revised $2,000,000 ($1,200,000)
$800,000 ($50,000) ($400,000) $350,000
![Page 59: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/59.jpg)
Conclusion of Value • Valuation Expert Analyzes the cash flow being
generated from subject company • The expert concludes that the income approach
is the major approach to determine the fair market value of subject company
• Expert determines the appropriate capitalization rate for subject company
• Capitalization rate is based upon numerous factors including US Treasury Bill rate, equity factors, size of subject company, industry of subject company, and any specific factors unique to this company
59
![Page 60: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/60.jpg)
Conclusion of Value • Net cash flow is divided by the capitalization rate
to determine the value of subject company • Another way to look at this: the value of the
company times the capitalization (interest) rate results in the net cash flow
• A $1,000,000 bank account that pays us 5% interest is generating $50,000 of interest income
• Isn’t this the same as stating that an account generating $50,000 of interest income/cash flow with a 5% interest (capitalization) rate is worth $1,000,000 because $50,000 divided by 5% is $1,000,000?
60
![Page 61: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/61.jpg)
Business Owner’s Argument
• Owner argues that business is generating no net cash flow because profits are being paid to him/her in the form of a $750,000 salary
• Owner argues that since the business has no value, there is no property settlement
• Owner agrees that (deductible) rehabilitative alimony should be awarded based upon his $750,000 salary
61
![Page 62: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/62.jpg)
Conclusion of Value
• Expert concludes that this entity is generating $350,000 of net cash flow and is worth $1,400,000
• Court accepts the expert’s findings • Court rules that spouse is entitled to a
50% equitable distribution and orders business owner to pay your client a $700,000 non taxable property settlement
62
![Page 63: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/63.jpg)
• Property Settlement determination was based upon the cash flow being generated over and above the owner’s reasonable compensation level (the $350,000 net cash flow over and above a reasonable salary of $400,000)
• Court determines that alimony and support should be based upon owner’s $750,000 actual W-2 earnings
63
![Page 64: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/64.jpg)
• Isn’t owner being asked to pay a property settlement, alimony, and child support on the same amount of cash flow
• Isn’t owner being hit two times off the same income/cash flow
• This is commonly referred to as the “DOUBLE DIP”
• Is this a fair/equitable result?
64
![Page 65: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/65.jpg)
Spousal Support Considerations in the Context of a Business Valuation
Sarah McCormack Kessler & Solomiany LLC
Atlanta, GA
404-688-8810 [email protected]
65
![Page 66: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/66.jpg)
THE DOUBLE-DIPPING PROBLEM
• Only arises in a context in which business valuation method being used is the income approach
‒ Under this method, future income stream is reduced to present value and added into the value of the business.
‒ Cf. asset approach (tangible plus intangible assets less liabilities = value)
‒ Cf. market approach (value based upon sales of similar business)
66
![Page 67: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/67.jpg)
WHAT IS THE PROBLEM, EXACTLY? • The same future income that is added back into the value of the
business, which is then equitably divided, is the source of funds for future alimony payments.
• SO: the payee spouse gets paid twice:
1) His / her share of the value of the business, the number for which is increased by the future income stream; and
2) His / her alimony package that is paid out of future income
stream generated by the business.
• Jurisidictions are divided as to whether this is, in fact a problem.
67
![Page 68: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/68.jpg)
Steneken v. Steneken, 873 A.2d 501 (2005): CLASSIC EXAMPLE OF COURT-APPROVED DOUBLE-DIP
• Relevant facts:
– Husband owned a closely held business (sole shareholder and operator).
– Trial court accepted wife’s valuation expert’s findings.
– That valuation expert used an income approach.
* As part of his analysis, he determined that the husband paid himself an excessive salary.
* The expert “normalized” that salary (i.e., brought it within reasonable salary parameters) in determining how much of salary was a permissible business expense that could be deducted from the overall business value.
* The excess salary, in other words, was brought back and included in the value
of the business.
68
![Page 69: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/69.jpg)
Steneken continued: “Normalized Salary” and Sweet Revenge
• At the initial trial court level, the trial court did this:
1) Included only the husband’s excess salary in the business value (having excluded the normalized salary as a business expense); and
2) Used the normalized salary as the basis for income out of which to pay spousal support.
__________________________________________________________________________
• Wife appealed.
• The appellate court, in an unexpected turn, agreed that alimony was too low in that it should have been calculated based upon EXCESSIVE salary versus REASONABLE salary.
• On remand, the trial court increased the alimony award on this basis. Now Husband appealed.
• The NJ Supreme Court upheld the double-dip.
• WHY??????? You may ask . . . . .
69
![Page 70: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/70.jpg)
The Steneken Rationalization • NJ’s alimony statute and equitable distribution statute did
not track each other, but rather were based upon different factors
• How much alimony is awarded should not be contingent upon what valuation approach the trial court deems is best
• “[T]he final judicial inquiry is plainly put: whether the ultimate result, both in its whole as well as in its constituent parts, is fair under the circumstances and congruent with the standards set forth in the [NJ alimony and equitable distribution statutes].”
70
![Page 71: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/71.jpg)
Ms. Steneken at the end of seven years of litigation:
71
![Page 72: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/72.jpg)
Is the Double Dip Always Inequitable?
• Maybe a back-door way of awarding, in effect, a greater share of a business asset (once as equitable division, then as alimony).
• Probably best practice is always to keep it “clean,” and to “call a spade a spade.”
• Ask for greater business share buy-out, or more alimony . . . . as the facts of the case and your client’s interests may warrant . . . . ‒ Minimize need of the payee spouse through equitable division (find liquidity to get him
or her a paid-off house, paid-off car, etc.)
‒ As an off-set to payee spouse receiving more of the “other” assets, leave fair share of business (if not greater share of business) in payor spouse’s hands
‒ Create alimony package based on decreased needs for cash and with goal of avoiding double-dip
• Certainly this approach is likely to result in less trouble / expense / appeal(s) for your client. • NOTE: most jurisdictions, if not all, do not worry about double dip in the context of child
support, the rationalization being that the welfare of a child is the paramount concern
72
![Page 73: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/73.jpg)
The Double Dip in the Context of a Divisible Professional License • As we know, a professional license is considered to be a divisible marital
asset in certain states.
• Some of those states recognize a “merger” doctrine under which the professional license, at some point, merges with the professional practice’s value (i.e., has no independent value).
• Probably assigning an independent value / income stream to a
professional license is most useful as an exercise when one divorcing spouse is in the fledgling stages of his or her professional career, and the other divorcing spouse effectively carried him or her through school.
• In this scenario, the professional practice would not have a limited value,
but the professional license would have a long, as-yet-unrealized “life.”
73
![Page 74: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/74.jpg)
From Grunfeld v. Grunfeld, 731 N.E.2d 142, 147 (NY 2000):
“Where the license is likely to retain its value in the future but the nonlicensed spouse may only be entitled to receive maintenance for a short period of time, it may be fairer actually to distribute the value of the license as marital property rather than to take the license income into consideration in determining the licensed spouse’s capacity to pay maintenance.”
74
![Page 75: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/75.jpg)
To Dip or Double Dip – That is the Question
At least one NY court distinguished the value of a professional license from the value of a business by saying that the professional license was an “intangible” asset and that the business was a “tangible” asset. There was, therefore, no double-dipping if spousal support paid out of this “intangible” asset versus the “tangible” one.
75
![Page 76: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/76.jpg)
THE PERSONAL GOODWILL PROBLEM
• The majority rule across jurisdictions is that personal goodwill, versus enterprise goodwill, in a business is non-divisible and / or excludible from the marital estate.
• Can this personal goodwill enhance a party’s spousal claim?
• The answer should be . . . .
YES
76
![Page 77: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/77.jpg)
Problem-Solving • If personal goodwill is not divisible as a marital asset, exclude its value
from the business value, but then ask to be made whole through alimony.
• Value of personal goodwill is sometimes calculated based upon a particular professional earning more than the average reasonable salary for comparable professionals in his or her community – the excess represents his or her special, non-marketable skill set.
• NOTE: this is different from the “excess” salary that is used, in an income approach analysis, to artificially reduce business value as a business expense
• This higher-than-average, personality-enhanced salary is why you should argue that there is an “enhanced” alimony claim (because this excess is excludible from the marital estate/ has enhanced the parties’ lifestyle during the marriage) – i.e., the payor should pay more than what the average Joe in his or her profession should pay.
77
![Page 78: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/78.jpg)
If you keep these spousal support considerations
in mind in a divorce involving a business, your clients won’t feel like this . . . .
78
![Page 79: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/79.jpg)
Business Valuation Case Update
Sarah McCormack Kessler & Solomiany, LLC
Atlanta, Georgia 404-688-8810
79
![Page 80: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/80.jpg)
The One Everyone Is Talking About: Adams v. Adams, 945 N.E.2d 844 (2011)
Case illustrating the difference in how to approach projected future income stream where dealing with corporation (infinite life) versus partnership (limited to individual’s remaining partnership years) . . . . APPLICATION: income approach valuation.
80
![Page 81: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/81.jpg)
Relevant Adams Facts:
• Husband was a partner in a large, successful investment fund partnership.
• Special master appointed by the court valued his partnership interest through income approach – result:
$81M partnership interest value included in the marital estate!!!
• Part of special master’s analysis involved reducing husband’s future benefits of partnership to present value.
• Upon appeal, husband argued:
1) Partnership interest too speculative to be included in the marital estate; and
2) Present value of his future partnership benefits was too high.
81
![Page 82: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/82.jpg)
The Supreme Court Judicial Court of Massachusetts rejected the first argument but agreed with the second:
“[W]e hold that a divorcing spouse’s interest in a partnership that produces a consistent stream of profits, and reliably disburses those profits to the partner spouse over a period long enough to appraise the present value of the partnership interest fairly, is, in the discretion of the judge, assignable to the marital estate if its inclusion would achieve a fair financial settlement.”
BUT: They then went on to hold that the special master should have used a discounted cash flow methodology versus a direct capitalization of income approach because the latter “assumes a perpetual stream of income” that is true of a corporation BUT NOT TRUE of an individual’s participation in a partnership.
NOTE: assuming perpetual life results in an artificially higher present value.
82
![Page 83: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/83.jpg)
OTHER NOTABLE RECENT CASES ON BUSINESS VALUATION (I.E., WITHIN THE PAST YEAR, PUBLISHED OPINIONS)
• Connecticut
McRae v. McRae, 129 Conn. App. 171 (2011) (upholding inclusion of check paid toward ongoing project in asset approach to business valuation, as well as alimony award [no income approach, so no double dip argument made])
• Massachusetts (other than Adams)
Caveney v. Caveney, 81 Mass. App. Ct. 102 (2012) (trial court could use asset approach versus income approach to value business – marketability discount and minority share discount should not be applied, however, where no imminent sale of a closely held business)
83
![Page 84: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/84.jpg)
OTHER NOTABLE RECENT CASES ON BUSINESS VALUATION (I.E., WITHIN THE PAST YEAR, PUBLISHED OPINIONS)
• North Carolina
Williamson v. Williamson, 719 S.E.2d 628 (2011) (court not bound to use any particular valuation method, so long as method chosen is sound – here, appellate court cannot tell how value reached, so remanded for clarification / reconsideration) Quesinberry v. Quesinberry, 709 S.E.2d 367 (2011) (trial court business value will be upheld if sound methodology – where no remaining assets, and no evidence of any other good will, other than perhaps simple name recognition, okay to assign business a $0 value and award to wife)
84
![Page 85: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/85.jpg)
OTHER NOTABLE RECENT CASES ON BUSINESS VALUATION (I.E., WITHIN THE PAST YEAR, PUBLISHED OPINIONS)
• North Dakota
Nuveen v. Nuveen, 795 N.W.2d 308 (2011) (upholding income approach to valuation of orthodontic practice and calculation of spousal support; no double dip argument made)
• Oregon
Hanscam v. Hanscam, 247 Or. App. 207 (2011) (if no value to business beyond assets, and no covenant not to compete – no goodwill that should be included in business value)
85
![Page 86: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/86.jpg)
OTHER NOTABLE RECENT CASES ON BUSINESS VALUATION (I.E., WITHIN THE PAST YEAR, PUBLISHED OPINIONS)
• Oregon cont.
Rodenbeck v. Rodenbeck, 246 Or. App. 449 (2011) (not permissible to discount buy-out amount paid to wife for her share of business in an amount representing the taxes that husband would have to pay on income used to effectuate that buy-out) NOTE: business valuations are often “tax-affected,” but there the tax on the BUSINESS is taken into account, not the tax on the INCOME stream used to buy out the business
86
![Page 87: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/87.jpg)
OTHER NOTABLE RECENT CASES ON BUSINESS VALUATION (I.E., WITHIN THE PAST YEAR, PUBLISHED OPINIONS)
• Wisconsin
McReath v. McReath, 335 Wis.2d 643 (2011) (saleable good will, whether personal or enterprise, is properly includible in marital estate; rejects double dip argument in spousal support context because asset can either be sold for full value OR can be retained, continue to produce income, and then later be sold – still for full value) NOTE: appeared to be a case of first impression on the goodwill issue.
87
![Page 88: Divorce and Business Valuationsmedia.straffordpub.com/products/divorce-and-business-valuations-2… · 15/03/2012 · Divorce and Business Valuations Navigating Complex Valuation](https://reader033.vdocuments.net/reader033/viewer/2022051903/5ff4dda75b82ff354f4e7683/html5/thumbnails/88.jpg)
COMING SOON . . . .
New law from excellent practitioners such as yourselves . . . .
88