As many know who perform valuation work for marital dissolution purposes, there is a heightened level of required detail to work in this specialty. The question we need to ask ourselves is what type or quantity of evidence is needed to establish the value of a business for marital dissolution purposes? This issue was key in the case of Hugh v. Hugh. In the wife’s appeal, she argued that the trial court had erred in its decision to decline to value and distribute the couple’s interest in the husband’s semiconductor brokerage of which he controlled.
Ambiguous Testimony
The wife retained a valuation expert who, in conjunction with the husband’s testimony, provided much of the evidence of the company’s value. The court made note that the husband’s testimony was “vague, indefinite and confusing.” Though the husband testified that the company had no inventory and no value, their website stated that it retained “the world’s largest inventory of semiconductor and manufacturing equipment parts.”
According to the court of appeals, the information provided to the wife’s expert was “scant and indefinable.” In addition, the husband was little help, offering limited documentary evidence. The evidence provided consisted only of the following:
- A 2010 tax return for the predecessor, showed $9.3 million in revenue and approximately $400,000 in profit;
- A 2010 financial statement which showed income more than double the amount on that year’s tax return;
- A 2011 tax return for the eight months before the predecessor company’s dissolution, showed $6.8 million in revenue, $50,000 in profit and $240,000 in officers’ compensation;
- The company’s 2011 tax return for the four months it was in existence during that year, showed $155,000 in revenue and almost $13,000 in losses;
- The company’s 2012 tax return, shows about $1 million in revenue and $150,000 in losses; and
- A list of 2012 debits from the company’s bank account, shows that $335,000 was used to pay personal expenses and most of the husband’s attorney’s fees.
- The husband stated that the company’s significant downturn in 2012 was due to the “bad economy” and a lackluster performance within the semiconductor industry. He stated that, based on his opinion, the company was worthless.
Difficult Analysis
The wife’s testifying expert utilized a market approach, determining that insufficient information existed to support the use of the income or asset approaches to valuing the company. Utilizing an analysis of 31 comparable companies and discounting his valuation by 30 percent to reflect the husband’s personal goodwill, the wife’s expert concluded that the company’s value was approximately $1.4 million.
The expert did acknowledge that, based upon the limited information produced by the husband’s counsel, the valuation did not meet the American Institute of Certified Public Accountants (AICPA’s) Statement on Standards for Valuation Services (VS Section 100). He expressed concerns about the accuracy of the tax returns, stating that a significant amount of personal expenses were run through the business. In addition, the expert was not provided general ledgers, QuickBooks files or a complete set of bank statements. Finally, the expert was excluded from interviewing management or conducting a site visit. Nevertheless, he believed the valuation was a useful and reasonable estimate of the company’s value.
The Court’s Findings
A trial court found that the appraiser lacked appropriate information and evidence to properly value the company; however, the Virginia Court of Appeals disagreed. Despite the trial court’s concerns with the tax returns and additional information relied on by the wife’s expert, the court concluded that a “relative wealth of information” could have been used to value the business. The appellate court held that tax returns which show a company’s gross income can be used to value a company, stating that “assuredly, a business that has gross income can be valued.”
In this case, the trial court had more than gross income as evidence and “the discretion to place a value within the range provided in witness testimony and documents received into evidence.”
Takeaway
In divorce cases, it can be difficult to obtain enough needed information to be completely comfortable with the conclusion of value. Nevertheless, it is important to keep an open mind for various ways to value a company based upon the information available, and an experienced, well-qualified appraiser can typically utility the information made available to them to derive a sufficient value for equitable distribution purposes.
Windham Brannon is well-versed in valuation for businesses and individuals when going through divorce and marital dissolution proceedings. For more information, contact your Windham Brannon advisor or reach out to Matt Stelzman.
