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Valuing a Family Business in a Divorce
There are smart people who spend their
entire lives learning how to value a closely
held business. You don't
have the time to do that in the midst of divorce, and neither do I.
What I can do, and what you can do
too, is to understand a little terminology - to develop a working understanding
of the methods used to value a business. Then you'll be able to talk intelligently
to one of those experts and have a rough idea what they mean.
What
is Value?
Book Value
Book value is an accounting term. Technically,
it is simply the assets of the enterprise less its liabilities, all at
their values as stated on the books of the company. It's usually not an
accurate measure of the real value of the company. For that reason, it's
seldom relevant.
Liquidation Value
The liquidation value of a company is
the value of its individual assets, valued as if the company will not continue
to carry on business. There are actually two "flavors" of liquidation value,
depending on the time available for the liquidation process:
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Orderly liquidation
value. This assumes that the enterprise can afford to sell its
assets to the highest bidder. It assumes an orderly sale process. It assumes
that the seller can take a reasonable amount of time to sell each asset
in its appropriate season and through channels of sale and distribution
that fetch the highest price reasonably available. |
|
Distress liquidation
value. This is a "fire sale" price. This assumes that the enterprise
must sell all its assets at or near the same time, to one or more purchasers.
The assumption is that the typical purchaser for the assets is a dealer
who specializes in the liquidation of the entire assets of a company. For
obvious reasons, the Distress Liquidation Value will always be lower than
the Orderly Liquidation Value. Depending on the enterprise and the nature
of its assets, the difference between the two values can be dramatic. |
Fair Value
Fair Value is primarily a term used
in stockholder litigation, and particularly where the company is attempting
to "squeeze out" one or more minority shareholders. Determination of Fair
Value is laced with issues revolving around the value of corporate control.
Fair Value is rarely relevant in valuing closely held businesses in divorce.
Click
here for a quick primer on business valuation.
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