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Valuing a Business or Professional Practice

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Valuing a Business

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A divorcing couple should consider using a professional business appraiser if they own a business or part of a business that is difficult to value. Businesses and professional practices are appraised every day for divorce purposes, and the American Society of Appraisers (ASA) and the Institute of Business Appraisers (IBA) have issued standards which their members are required to follow when valuing a business. Professionally accepted methods and techniques, which have been tested in court, have replaced what was once largely a matter of individual opinion.

The appraiser generally produces a written appraisal report detailing the analysis and steps taken to reach a value conclusion, although some divorce attorneys prefer to limit the written material to computations and exhibits. In mediated divorces it is typical for the two parties to retain a joint appraiser, which may save fees, but in more contentious divorces it is typical for each side to retain its own appraiser. There are advantages and disadvantages to each alternative. If a business is likely to have little or no value, an appraiser may provide an opinion whether the value of the business is likely to exceed the cost of the appraisal after a short, inexpensive preliminary review.

Each business may require a different approach, but ASA and IBA appraisers typically follow a similar general procedure.

1. Define the appraisal assignment, including an exact description of the interest being appraised (example: 50% general partnership interest), the effective date of the appraisal (example: date of separation), and the applicable standard of value (example: "fair market value").

2. Gather data on the business and the industry in which it operates. Data on the business typically includes tax returns and financial statements, asset lists, ownership information, sales and marketing plans. An interview with management provides important information on the risks of the subject business and its future.

3. Analyze the data for trends and for strengths and weaknesses. Analysis of financial trends within the subject business is often supplemented by comparison with industry statistics.

4. Arrive at a value conclusion after considering all relevant approaches to valuation for which reliable data are available. This will include approaches based on the income and cash flow of the business, the assets of the business including its intangible assets (example: "goodwill"), and the market value of the business if were to be sold. Relevant methods may be applied, such as the "excess earnings method" for valuing goodwill.

If different values are obtained from the different approaches they must be reconciled. The final important step is to test the value for reasonableness, which is sometimes called a "sanity check".

In many states, the value of a business or professional practice for divorce purposes does not necessarily reflect the "fair market value" it would sell for on the open market. A heart surgeon may earn $1 million a year, but have difficulty selling his practice because his patients are attracted by his reputation and would not happily transfer to a buyer. The law in many states requires that the difficulty of transferring the practice be disregarded for divorce valuation, and the assumption be made that the non-practicing spouse be treated as a retiring partner.

Our firm appraises businesses and professional practices for divorce and other purposes in compliance with the standards of the American Society of Appraisers.