When it comes to divorce, there are many areas where an expert witness can assist the trier of fact in determining the value of marital property. In instances where a business is involved, the valuation expert is retained to provide an independent opinion to substantiate the value of the business. An expert witness in divorce engagements may also help determine spousal support as well as forensic analysis in the search for hidden assets.
When there is a business interest involved, the valuation process is similar to valuations performed for other purposes, with one notable exception. The State of Michigan recognizes the concept of holder’s interest in determining the applicability of discounts to the value of the business interest.
Under the fair market value standard, value is determined based on a hypothetical seller and a hypothetical buyer, both having reasonable knowledge of the relevant facts underlying the business.
In the divorce context, the underlying rationale is that the owner will continue to operate the business and that there is no hypothetical buyer and seller of the business interest. Therefore, there would be no discounts applied to the overall value for lack of control or a lack of marketability as there is under the fair market value standard. This is generally the case where the ownership interest being valued has control (over 50% interest).
It is important to keep in mind that the holder’s interest standard is specific to Michigan case law and may be different in another state that follows other court precedents.
Another area where Michigan varies from other states is the concept of personal goodwill. Personal goodwill (especially when valuing a professional practice), focuses on intangible assets that cannot be separated from the owner.
Examples include but are not limited to:
- Reputation of the owner
- Years of experience
- Owner’s work habits
- Business name (tied to the owner)
In the case of personal goodwill in Michigan, prior court precedent has determined that personal goodwill cannot be separately distinguished from that of the practice or enterprise. However, other states do allow for the separation of personal goodwill from that of the company.
Business valuation and litigation support in the divorce context can be challenging. It’s important to call on professionals in this area who can assist the trier of fact in determining how to equitably split the marital assets, especially where the complexities of a business are involved. Yeo & Yeo’s Business Valuation and Litigation services group can help ensure that you receive the consideration you deserve.