Evidence is Needed to Support a Business Value

Did you ever wonder how some courts can arrive at a business value that seems clearly out of character with the principles of business valuation? This frequently happens in divorce cases but can happen in other cases also—for example, in an economic damages case that relies on the diminution of value of the business. There is a simple answer to this question. In general, all courts have to deal with the evidence that is presented in arriving at its opinion.

In the Bergquist1 case, for example, neither party submitted a valuation of the business by expert testimony. Instead, the court was presented only with information as to the estimated value of the inventory of the business provided by each of the parties but not by business valuation professionals. Such a value (i.e., the value of the inventory alone) does not meet the barest of requirements for a business valuation. But that is all that the court was presented with.

So what did the court do in this case? The court determined a value of $160,000 but did not explain how it arrived at that value. On appeal, the wife pointed out that the trial court’s value was out of the range of values supported by the evidence. The trial court was presented with three options of the value of the wife’s business: (1) the wife’s estimate of the value of the inventory, at $84,824; (2) the husband’s estimate of the value of the inventory, at $123,000; and (3) the parties’ accountant’s estimate of the value of the inventory, at $105,790.

The wife won her appeal but only because the court determined the amount of $160,000 was not within the range of evidence. The appellate court remanded for the value of the business “that is supported by the evidence and recalculate the equalization judgment accordingly.”

In the West2 case, the wife appealed, asserting that the trial court erred in not ordering new evidence to support the valuation of the husband’s business. Initially, a magistrate judge had valued the business by taking the cost value of the company’s fixed assets from the company’s balance sheet ($541,068). The husband objected to that value ,and the trial court, on review of the magistrate’s decision, instead valued the company at the net book value ($27,143). The wife argued the trial court should use an income approach and determine the going concern of the business.

The appellate court affirmed the trial court decision. Why? Because neither side presented expert testimony by a business valuation professional as to the value of the business, so the trial court had to make the decision on value based on what was in evidence, even though what was in evidence was clearly not sufficient to determine the fair market value of the business.

Both of these cases are examples of a woeful submission of evidence as to the value of a business. Many cases have concluded that the trial courts can only use evidence in submission to determine the value of a business. These cases and other similar cases can be helpful to convince the client why it is important that it is necessary to engage a business valuation professional to determine and testify as to the value of a marital business.

1 Bergquist v. Bergquist, 2024 Ind. App. Unpub. LEXIS 434 (April 4, 2024).

West v. West, 2024-Ohio-1086; 2024 Ohio App. LEXIS 1024; 2024 WL 1253031 (March 25, 2024).