Do BV Standards Have Any 'Value' in Court?

Do business valuation standards have any value in court? Years ago, in a divorce case, our side presented evidence that the opposing party’s expert had violated the AICPA’s Code of Conduct by testifying while he had a conflict of interest. That was a clear violation of the AICPA standards. After presenting a motion to have the witness excluded from testifying, the judge simply said, "Take it up with your ethics board, I want to hear what he has to say." That was "lesson learned" for me. Standards and, yes, even ethical codes are not binding on courts.

In In The Marriage of Brown,^[1] the court ignored evidence that one of the husband’s experts had violated the AICPA’s BV standards and utilized an unorthodox methodology to value his client’s business. Nevertheless, the trial court adopted that expert’s value in total and gave no consideration to the wife’s expert’s valuation. The appellate court affirmed the value the trial court accepted.

The husband’s expert valued the business at $16,000, arriving at his value by starting with the cost of the tangible assets of the business, a chiropractic practice, and subtracting “depreciation” related to the economic lives of the assets. The expert explained that this was the best method to value a small business because any goodwill in a sole practitioner’s practice would be attributed to the practitioner and not to the entity.

The wife’s expert explained that the husband’s expert did not use any of the three approaches to value in the BV standards required to be considered, explaining that the husband’s expert did not perform a “valuation” under the standards but instead did a “calculation” and did not use professional judgment. He did not determine the FMV of the assets and made no consideration of entity goodwill. Collectively, this process was not, in the opinion of the wife’s expert, in compliance with the AICPA BV standards. 

Both courts adopted the methodology the husband’s expert established despite a clear indication that the BV standards had not been complied with. It should be noted that the wife’s attorney did not object to the husband’s expert’s testimony. Thus, the question of what the trial court might have decided had the issue of noncompliance with the standards been brought before the court remains unanswered.