During the divorce of the California Devries, a court-appointed forensic accountant valued the husband’s construction business under the excess earnings and capitalization of earnings approach, determining no goodwill value. Using three months of past gross profits, however, the expert came up with a goodwill value of $100,000, which the court adopted in addition to a $750,000 asset value. The husband appealed, claiming that the expert’s use of a three month’s rule of thumb violated Standard 39 of the AICPA’s valuations standards (SSVS-1), which provides that rules of thumb “should generally not be used as the only method to estimate the value of the subject interest.”

In In re Marriage of Devries, 2009 WL 4264309 (Nov. 30, 2009)(unpublished), the California Court of Appeal disagreed. Like many state jurisdictions, the California courts recognize the applicability of the AICPA and other professional standards to valuation issues, but they also have a large body of case law holding that valuation is a flexible determination, based on the various facts and circumstances of each case. “The AICPA guidelines are instructive but not dispositive on the issue,” the court held, relying on prior precedent (the valuation of a medical practice using three months of accounts receivables) to confirm the lower court’s decision. Read the entire case abstract in the next (February 2010) issue of the Business Valuation Update™, and the full-text of the court’s opinion at BVLaw™.