If A Divorce Is Contested, Can Each Spouse Choose A Different Valuation Method When It Comes To Valuing The Business?
Yes, and that is usually the case. There are different valuation methods that the court perceives as appropriate. Each party will choose a different valuation method because if one party wants the value to be high, they’re going to select the valuation method that results in a more considerable value. The court hears the reason for the expert’s decision to use a particular approach.
If we have an income-producing business such as an IT consulting business and if I am the business owner, I want the business’s value to be related to goodwill because goodwill goes with the person because it’s not an asset of the marriage. I want the valuator to talk about the hard assets of that business of which there will be very few because it’s a people business, not a hard asset kind of business. The other side will talk about the stream of income. We’ll both argue to the court that our approach to valuing the business should be considered more valid than the other for these reasons. We would each have reasons, and the stream of income method with an IT consulting firm will claim that that stream of income has been coming in for 20 years, and although it may have been created off the hard work of the business owner, it’s likely to happen in the future. The business owner’s presence would be irrelevant because somebody else would buy that stream of income for whatever they determined the value was.
If you had the business owner, you would argue that if you were to walk away tomorrow, the stream of income would be gone, and therefore, that isn’t a value of the business. It’s the value of the owner, and they’re not being auctioned off. They would say that the only tangible assets are the 17 computers and the software licenses that have been paid through the end of the year. The value of those two business valuations is incredibly different. One comes out at about $470,000, and the other one comes out at $8 million. That’s not an unusual thing to walk into court and make the judge make that decision based on your expert’s testimony. The expert would testify in court regarding their approach to valuing the business, the elements they considered in valuing the business, why they chose that particular business valuation method and why their method is correct. Then the judge decides if you can’t settle the case and agree and makes the decision in the end which valuation is more appropriate. The judge can take either approach or, based on each approach’s testimony, take a hybrid and choose something closer to the middle of the two values.
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