When is it appropriate to use a calculation of value in court?

When the court specifically asks for one!  At least, that’s the implicit reading of a new California divorce case, in which both party experts valued the husband’s 80% interest in a radiology software company at the beginning of the marriage (1995), for determination of its appreciation until the company’s sale three years later (for $7.5 million). The husband’s expert used the comparable transactions approach, which better captured the high-tech start-up’s value, he said. At the same time, he relied on sales data that took place after the valuation date because earlier comps “were not on hand at his office.”  The court agreed with his method but ordered both parties to find better comps—and at the next hearing, the husband’s (new) appraiser said he had searched “numerous” databases but could still find only one comparable sale that took place before the valuation date; the remainder took place within a year.

Nevertheless—citing an article by Shannon Pratt in the March 2002 Business Valuation Update, (“Should Subsequent Events be Considered in the Present Value of the Business Entity”), the expert maintained that these comps were the best evidence of value under the facts of the case, particular given the availability of six transactions within a year of the  valuation date, including three sales of radiology systems; the intervention of the Stark laws; and the likelihood that the subsequent sales were past the initial offer stage as of the valuation date. The court agreed, and adopted his $6.25 million value—and the wife appealed, arguing in part that the husband’s expert had “only” a calculation of value (under the applicable ASA BV standards).

That may be, but the expert was operating under specific instructions from the trial court to present “comps only” evidence, the appellate court said. “Whether labeled a ‘calculation’ or ‘conclusion,’ [the expert’s] analysis was valid evidence upon which the trial court properly relied,” it ruled, and confirmed the $6.25 valuation. Read the complete digest of In re Marriage of Price and Turkanis, 2011 WL 1783096 (Cal. App. 2 Dist.)(May 11, 2011) in the August 2011 Business Valuation Update; the court’s opinion will be posted soon at BVLaw.