If a party to a divorce action owns an interest in a closely held business, that interest must be evaluated by an expert. A valuation is not based on book value. Book value fails to deal with the realities of the market, good will, actual profits, and discounting, if applicable. Valuations are very expensive given the amount of documents an expert must analyze. If each party decides to hire their own expert, the expenses are double.

In any divorce case, the parties can try to minimize these expenses by (1) hiring a joint expert, or (2) requesting a preliminary evaluation with the hope they can negotiate a settlement from it.

There are three methods of valuing a closely held company, and all three methods should be performed in every business evaluation. They are (1) capitalization of earnings, (2) the market approach, and (3) appraisal of all the assets. Once all three methods are completed, the evaluator can choose which one best reflects the value of that particular business.

Our courts have determined that IRS Revenue Ruling 59-60, which sets forth factors that should be considered in evaluating a closely held business, is applicable when valuing a business for divorce cases. The factors are as follows:

  1. The nature of the business and the history of the enterprise from its inception;
  2. The economic outlook in general and the condition and outlook of the specific industry in particular;
  3. The book value of the stock and the financial condition of the business;
  4. The earning capacity of the company;
  5. The dividend-paying capacity;
  6. Whether or not the enterprise has goodwill or other intangible value;
  7. Sales of the stock and the size of the block of stock to be valued; and
  8. The market price of stocks of corporations engaged in the same, or similar, line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

Our courts have stated that the above list is not all-inclusive. No one factor or factors can be considered in a vacuum and consideration must be given to the interrelationship of all relevant factors.