Business Valuations

Often a family business, or closely held business, (non-public) can be the single largest marital asset.  In this situation establishing a value on the business can be critical. The court must, by law, place a value on the business if the parties cannot agree.  Where a business has significant assets or is the main source of income for the parties, in order to do an accurate valuation the attorney must hire the services of an expert. A CPA, forensic accountant, or other qualified professional would examine the business’ assets and liabilities, five years of tax returns, earnings history, sales of similar businesses, goodwill, book value of the stock, buy-sell agreements and other factors including the nature of the industry and the outlook for the economy.  The attorney cannot do this work since in most cases he does not have the background or expertise and more importantly cannot act as a witness. 

Although the valuation process is too complicated to do justice here, nevertheless, the most commonly used method of valuation in Michigan is the “capitalization of earnings” approach.  This method looks at the real value of a business and its ability to generate future earnings and profits for the owner over and above what it pays the owner as reasonable compensation for doing his  or her job.  The expert attempts to estimate the future earning capacity of the business then determines how much capital an investor would be willing to invest in a different investment of the same risk to generate the same amount of income.  This is done by multiplying the future earnings by a capitalization amount or “cap rate”.  The cap rate is based on the rate of return for other types of investments that carry similar risks to the business being appraised.  Once a valuation is made the expert then discounts and/or enhances the value of the owner’s interest based upon percentage of ownership (i.e. a minority shareholder would have his interest discounted to reflect his minority interest in the business).

Valuation of a family business or closely held business is a joint effort of both the attorney and the expert.  The expert arrives at the valuation and your attorney advocates for the expert’s method of valuation and the valuation number.  With the stakes so high, it is critical that you have both a qualified expert and an attorney with the knowledge, skills, expertise and background.

As a private practitioner doctor how and why can my practice be valued since without me there is no practice and therefore no value?
This questions is asked by virtually every professional going through divorce whether it be an architect, CPA, doctor or attorney. The answer is that the courts try to be fair to both the professional and the professional’s spouse by the doctrine of “holder’s interest” value.  On the one hand, if the professional retires or quits, unless he or she can sell the practice, there is no value or at least the value of the practice would be diminished without the daily involvements of the professional.  On the other hand the practice often affords a comfortable, if not generous, lifestyle for the professional.  To resolve this conflict, the courts have fashioned a compromise called a “holder’s interest” and found that the valuation of the professional practice should be the value of the practice to the professional as a going concern rather than the market value of the practice to an outside party.  Accordingly a professional practice is valued as if it were going to continue in the hands of the current owner rather than being devalued for hypothetical loss of the professional’s involvement.  This issue is often less complicated when the practitioner is a member of a partnership or part of a large group of professionals, in which case, such practice can clearly be valued distinct from any single owner. 

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