How do I value my husband’s shares in his family’s business? This issue frequently occurs in divorce cases where one or the other spouse derives his income from a successful small business. The stock of the business is not traded on a stock exchange, making it difficult to ascertain the value of the ownership interest. Typically, the spouse who works in the business will receive the shares in the divorce. His continued employment in the business may generate the income used to pay alimony and child support. In addition, the shares may have substantial value as an asset to be equitably divided in the divorce.
Determining the value of an interest in a closely held corporation is one of the most difficult financial issues that a couple can face in a divorce. It often requires the services of an accountant or business valuation appraiser, with expertise in the field of business valuation. These experts generally apply one or more of several commonly accepted valuation methods to determine the value of the business. These methods include the adjusted net-income approach, the adjusted net-asset approach, and the comparable sales or market approach.
Until 2007, business valuation experts in Massachusetts applied a “fair market value standard” in determining the value of shares in a closely held corporation. The “fair market value standard” was defined by the Internal Revenue Service as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” After valuing the business itself, experts would often apply sharp discounts to the value of individual shares due to the lack of an accessible market to sell the shares, and/or due to the lack of control the owner of a minority interest could exert over the business. These discounts, known as “marketability” and “minority” discounts often reduced the value of the shares by as much as 40% to 50%.
In 2007, the Massachusetts Supreme Judicial Court decided the case of Bernier v. Bernier, 449 Mass. 774, 785 (2007), which involved the value of a family owned chain of supermarkets. In Bernier, the husband testified that he had no intention of selling his interest in the supermarkets. As a result, the Courts applied a “fair value” standard in determining the value of the parties’ shares. The fair value standard is different than the fair market value standard. The fair value recognizes that the value of a small, private business is often greater to its shareholders than it is to outsiders looking to buy the business. The Court also explained that where an owner has no intention of liquidating his interest, the application of a marketability or minority discount unfairly deflates the value of the interest.
The application of a fair value standard dramatically changed business valuation practices in Massachusetts in ways that continue to play out in the courts. Recently, in Caveney v. Caveney, 81 Mass.App.Ct. 102 (2012), the Massachusetts Appeals Court refused to apply either a marketability or minority discount to the value of a wife’s shares in three family businesses, which she owned, but had no intention of selling. In so doing, the Appeals Court followed the principle articulated by the Supreme Judicial Court – no sale, no discount.
Should you have any questions regarding a domestic relations matter, please contact one of the experienced family law and divorce attorneys at Doherty, Ciechanowski, Dugan & Cannon, P.C., including Steven D. Weil or Michelle Raymond.