In my last posting, I gave an overview of how closely held businesses will be treated under Maryland’s Marital Property Law. Most owners have poured their heart and soul into making their business a success. Therefore, it is not surprising that the combination ending a marriage and subjecting the business to judicial scrutiny, may create an emotionally charged atmosphere.
In such instances, the experience and skill set that is needed is that of a Maryland divorce lawyer with business litigation experience. One of the most difficult aspects of such cases involves the valuation of the business.
“ There are probably few assets whose valuation imposes as difficult and intricate a task as interests in close corporations.
Unless an owner can qualify as expert witness in valuing businesses, he or she cannot testify to the valuation. Instead both parties will have to hire expert witnesses. “There are probably few assets whose valuation imposes as difficult, intricate and sophisticated a task as interests in close corporations”. Book value is usually to simplistic an approach. It fails to deal with goodwill, actual profits and discounting of minority interests.
Factors that an expert will consider include the nature and history of the business, the economic outlook in general and outlook of the specific industry, book value and financial condition of the business, its earning and dividend-paying capacity, any good will or other intangible value, prior sales of stock and market price of stock of similar businesses traded on a stock exchange or over the counter. This list is not all inclusive and there is no formula for determination of how they interact.
Once an expert has obtained the available information, there are three principle methods of evaluating a business: (1) capitalization of indicated earnings at a reasonable return on investment, after consideration of interest rates and risk, (2) comparing price to earnings ratios for comparable businesses that are publicly traded or (3) appraisal of individual assets both tangible and intangible.