What business is your subject company in? That’s a fundamental question, but it could be a major stumbling block in a valuation—as a new case shows.

New case: In an Illinois divorce case, the husband and wife were equal partners in a company, iTouch Biometrics, which offers live scan systems (inkless, digital fingerprinting for law enforcement, schools, etc.). The software is not sold separately but is part of an integrated package that includes hardware, installation, maintenance, etc. (a web search shows the company’s SIC and NAICS codes are for business services).

The wife’s valuation expert used an “investment method” based on his M&A experience with software-based companies and came up with $5.1 million. The husband’s expert used a capitalized cash-flow analysis (single period) to value the company at $1.2 million, using the factors in Revenue Ruling 59-60 to back up his opinion.

Wrong biz: The trial court found that the wife’s expert did not establish that the company was primarily a software company, so his market comps were not valid. The court rejected his analysis entirely and found that the husband’s expert provided the “only credible fair market value opinion presented to the court with proper foundation and basis.” The wife appealed but she did not prevail.

The case is In re Marriage of Bornhofen; 2023 Ill. App. Unpub. LEXIS 2062, and a case analysis and full opinion will be available on the BVLaw platform.