A divorce settlement includes the concept of equitable distribution, which isn’t a factor under a fair market value premise. The meaning of equitable distribution varies from state to state. In New Jersey, equitable distribution is governed by N.J.S.A. 2A:34-23(h). Consistent with the statute, all marital property is to de divided equitably. It is important to remember that equitably does not mean equally.
Since the Court’s decision in Brown v. Brown, it is now well known that the standard of valuation of businesses incident to divorce litigation in New Jersey is “fair value.” 348 N.J. Super. 466 (App. Div. 2002).
The general idea is that the settlement is decided by the court, which is supposed to determine the most equitable distribution. By contrast, in a sale the parties are presumed able to look out for themselves.
In New Jersey, courts are obligated to: (1) identify the assets of the parties; (2) value the assets of the parties; and (3) determine how those assets are to be divided between the litigants. Rothman v. Rothman, 65 N.J. 219, 232 (1974).
In judging what an equitable distribution of a business is, the courts often consider the following:
- Goodwill. Any elements like professional goodwill may be a significant part of the business, but the view on whether goodwill is considered a divisible asset varies considerably. This could have an important effect on the value of the business. “[T]he determination of the amount ascribed to goodwill is a complex question of fact.” Slutsky v. Slutsky, 451 N.J.Super. 332 (App. Div. 2017). In other words, the Court will engage in a fact specific, case by case analysis to determine the value of goodwill.
- Intangible value. What about intangible value? Ordinarily, the value of intangibles is based on how much they are expected to contribute to future earnings. “As distinguished from tangible assets, intangibles have no intrinsic value, but do have a value related to the ownership and *429 possession of tangible assets. Some intangibles, such as a trademark, trade name or patent, are related to an identifiable tangible asset.” Dugan v. Dugan, 92 N.J. 423 (1983). On the other hand, it is a settled legal question that intangible goodwill may attach to an attorney’s interest in a professional practice. Thus, goodwill needs to be considered when valuing a business for divorce purposes.
- Discounts. Some courts in certain states have expressed reluctance in divorce cases to allow various discounts common to fair market valuations. The most important discounts — the lack of marketability followed by the minority interest — are harder to justify when no actual sale is contemplated. These can also include a “key person” discount if that person is one of the spouses and he or she intends to continue working in the business. In addition, some courts, depending on the unique circumstances of the particular case, may not allow discounts for difficulties in getting financing for a buyout, or for poor product diversity or unaudited financial statements. They would argue that these problems are germane only to potential buyers. In Brown v. Brown, the Court held“[t]he general rule we deduce … is that in a statutory appraisal for purposes of determining the fair value of shares owned by a dissenting shareholder, … or for valuing shares in a court-ordered buy-out resulting from an oppressed shareholder situation …neither a marketability nor a minority discount should be applied absent extraordinary circumstances.”
Supporting the Value in Court
If the divorce goes to court, the valuator must persuade the court that his or her figure is the most accurate. Whatever method the valuator uses, it must be supportable. Unsubstantiated numbers don’t hold up in court. The obligation to perform the necessary valuation is laid upon both the attorneys and the judge before whom the case is pending. See Bowen v. Bowen, 96 N.J. 36, 43 (1984); Levin v. Levin, 129 N.J. Super. 142 (App. Div. 1974).
“A trial court is free to accept or reject the testimony of either side’s expert, and need not adopt the opinion of either expert in its entirety.” Carey v. Lovett, 132 N.J. 44, 64 (1993). It is important for an individual to choose a qualified attorney and expert to present the facts and evidence in a light most favorable to the Court.
There’s widespread difficulty in discovering a business’s true worth for divorce valuations. Business owners who refuse to provide documentation to their spouses’ financial advisors can be penalized by the courts, but this doesn’t guarantee total honesty. Valuators respond by coming up with creative methods of uncovering information.
Some business owners may deliberately try to undervalue their companies to minimize their spouses’ settlements. Deliberately minimizing or even dissipating the value of a business can be hazardous, even if the financial expert can’t prove the profits were larger than stated.
Some divorcing spouses attempt to use the amounts of key person insurance on the spouse involved in the business or the terms of a buy-sell agreement as indications of the worth of the business. The agreements and insurance policies could have been set up years before, though. They don’t necessarily indicate the business’s worth at the time of the divorce. Nonetheless, the courts consider buy-sell agreements a factor.
At the end of the day it is important to remember that “valuation is not an exact science.” Brown v. Brown
It is important that you select an experienced matrimonial attorney who can help guide you through your divorce litigation. Call 732-414-6669 to schedule your consultation today!