In some divorces in Tennessee, one or both spouses own or have ownership interests in small businesses or closely-held companies. These ownership interests are often classified as a marital asset that must be divided between the spouses as part of equitable distribution.
However, unlike a publicly traded corporation, the value of ownership interests in a small business or closely-held corporation is not easily determined. Instead, divorcing spouses will often hotly contest the value of business interests.
When divorcing spouses are unable to agree on the valuation of business interests owned by one or both spouses that qualify as marital property, Tennessee courts are called upon to determine the value of the business interests so that they can be equitably divided between the spouses.
The court will often look to the opinions of the spouses’ business valuation experts. Often the court will start its valuation analysis by determining which method of business valuation is most appropriate to value the business interests at issue.
If the parties’ experts have offered opinions using valuation methods deemed appropriate by the court, the court may rely on the experts’ data to arrive at a valuation. Or, the court may accept one expert’s appraisal that the court deems more credible than the other expert’s assessment.
In a divorce proceeding, the spouses are usually free to agree upon or stipulate to a value of a business being equitably distributed as an asset in the divorce. However, when spouses cannot agree on the value of a business, a Tennessee court must perform a valuation of the company. Several valuation methods can be used to calculate business valuation.
The “fair market value” of a business is the price that a buyer of the company would pay to purchase the company in an open market from a willing seller, with neither buyer nor seller under any compulsion to complete the transaction. Fair market value is also often described as “net fair market value,” meaning the price of the minus any liens or debts encumbering the business as of the date of valuation.
The “liquidation value” is the amount that a business owner would receive if the owner were forced to sell the business. Unlike the fair market value, liquidation value assumes a transaction made under some compulsion, and thus, liquidation value is usually lower than fair market value. As a result, liquidation value is rarely used as a proper valuation for a business.
The “going concern value” is the value of a business that is presumed will continue to remain in business and remain indefinitely profitable. Going concern value differs from fair market value and liquidation value because going concern value assumes the company will forever continue to generate profit — this profit contributes to the value of the business beyond merely the value of the assets of the business.
The “book value” is a value that is calculated by adding up the value of all of a business’s assets and then deducting the total amount of all the business’s liabilities. Although book value can contribute to the ultimate valuation of a company in divorce proceedings, it is often not the sole or primary piece of evidence because book values can be easily manipulated.
The “cost value” or “original cost” value is the total cost that would be incurred to start up the business. Cost value is usually not a reliable valuation method of a company once it is past its initial start-up phase since companies tend to increase in value after the costs to acquire the tangible assets needed to start up the business are expended.
Many disputes over business valuations in divorce center over the value of the business’s goodwill. “Goodwill” is the term for all intangible assets that are not separately identifiable and not capable of being separated and sold, transferred, leased, or licensed from the business.
Goodwill effectively encompasses that part of a business’s value that cannot be attributed to other tangible or intangible income-producing assets. Goodwill can include intangible assets such as a company’s customer base, employee relations, or reputation. Although businesses are required by accounting practices to include goodwill on the balance sheet, there are competing methods of calculating and accounting for goodwill.
How Tennessee divorce law values goodwill depends on how the goodwill is classified. If a business’s goodwill can be bought and sold, then the goodwill is “realizable goodwill” or “enterprise goodwill,” and the court will put a value on the goodwill and divide it between spouses as part of the value of the business.
If a business’s goodwill cannot be bought and sold, it is “unrealizable goodwill” or “professional” or “personal” goodwill. This occurs when a business’s goodwill is directly tied to an owner or employee of the company, such as in a professional practice like a medical or dental practice. Tennessee divorce law holds that unrealizable goodwill cannot be valued or divided in a divorce.
If you or your spouse hold ownership interests in small businesses or closely-held companies and are engaged in a dispute over the business’s valuation, you need experienced, aggressive legal representation that will vigorously advocate and fight to protect your rights and interests.
Getting a business valuation right in a divorce can mean a difference of hundreds of thousands or even millions of dollars in the equitable distribution of the marital estate between you and your spouse.
Call (901) 562-3605 or fill out a contact form online to schedule a free initial consultation with Tennessee divorce attorney Shannon A. Jones today. He will help you understand the process of business valuations in divorce as it relates to your business or your spouse’s business. Attorney Jones will be committed to helping you secure the property you are entitled to under Tennessee’s divorce laws, so don’t hesitate to reach out for help today.