When a business’s value is in dispute, the dueling parties usually turn to qualified valuation experts. However, sometimes parties assert their own opinions about value. Or they submit expert opinions that are rejected for failure to meet professional standards and reliance on insufficient data.
After the trial court was confronted with a case featuring both of these circumstances, it declined to assign a value. However, in its unpublished opinion (Hugh vs. Hugh), the Virginia court of appeals found that the lower court had possessed “a relative wealth of information” from which it could have valued in the business.
Trial Court Punts
The business was a marital asset in a divorce case. The wife had held a 51% interest in the predecessor business, but the husband ran the company. He dissolved that company in June 2011 and reopened under another name. The husband was listed as the 100% owner or the new business. Tax returns showed a massive drop in income from 2010 to 2012, and the husband – who didn’t present expert testimony – claimed the company was worth nothing.
The wife’s expert received “scant” evidence from the husband. Instead, he reviewed the company’s website, tax returns, financial and bank statements, invoice and purchase orders, and depreciation and amortization schedules, as well as depositions of the husband and his CPA. Applying a market approach, the expert valued the business at $1.4 million. He testified that this value was based on “sound foundation and fact and accounting theory.” But he acknowledged that, due to the limited data made available by the husband, it didn’t meet the American Institute of Certified Public Accountants’ standards.
Citing insufficient evidence, the trial court declined to value the business or subject it to equitable distribution. The wife appealed.
Appellate Court Returns to Sender
The court of appeals pointed out that “the type or quantity of evidence required to enable a trial court to value a business is not fixed.” Although the trial court had “understandable doubts” about the husband’s credibility and the professionally limited basis for the wife’s expert testimony, it had sufficient information to value the company.
The court of appeals sent the case back. It directed the lower court to value and distribute the company.
The greater the amount of discretion a court exercises when valuing a business, the less likely the decision will be fair and accurate. Arm yourself with a qualified valuation expert who can guide the trial court to the right value.
theKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations. Our experts are trained and experienced in the litigation process. We can help guide the court to the right value in your next case. For more information, please call us at 210-340-8351.
Additional information included in this report was provided by PDI Global/Thomson Reuters © 2015