Business Valuation
By Statute, Oklahoma law requires the trial court to divide marital property fairly and equitably in every divorce. A business that was established during the marriage or grew due to the couple’s joint efforts is considered marital property and thus subject to division. But how does the trial court decide who gets what? The first and arguably most important step in this process is assigning a value to the business. This valuation will take into account both tangible and intangible assets, as well as the overall context of the business operations.
Business Assets
Oklahoma case law clearly establishes that the trial court has discretion in deciding the appropriate date for valuing business assets, considering all the relevant circumstances. The trial court also has discretion in selecting the method for valuing marital property and its determination will not be overturned on appeal unless it is contrary to law or clearly against the weight of the evidence. Regardless of timing and method selected, a thorough and accurate assessment must account for both tangible and intangible assets, including what is known as a company’s “goodwill value.” Goodwill value refers to the worth of a business’s intangible assets, such as customer loyalty and future growth potential. However, it is important to note that not all goodwill value will be considered in the business valuation for equitable division during divorce.
During divorce, it is crucial to accurately value a business by differentiating between “enterprise goodwill” and “personal goodwill.” Enterprise goodwill refers to a marketable business asset that is separate from an individual’s personal reputation. Moreover, it has a clear and identifiable value as a business asset and can be reflected in the sale or transfer of the business. On the other hand, Personal goodwill is tied to the presence of a specific individual and is not a marketable asset independent of that person. Therefore, personal goodwill should be excluded when presenting a dollar value for a business to the court.
In Re Marriage of Dorsey, the Oklahoma Court of Appeals decided that the evidence did not support the trial court’s valuation of the parties’ oil field construction company because the “Wife’s expert did not distinguish between enterprise goodwill and personal goodwill.” The Company only owned a few tangible assets, including a few vehicles, and was “primarily operated as a shell to shield the parties’ from personal liability.” The Wife worked as an accountant for the company and the Husband was the sole operator for any services the Company provided.
At trial, the Wife presented expert testimony claiming that the value of the Company included a “marketable business goodwill which was distinct from [the] Husband’s reputation and person efforts.” The Husband appealed, arguing that the Wife’s expert testimony significantly overvalued the Company. On appeal, the court agreed with the Husband, reasoning that the Wife’s expert testimony failed to take into account how the company’s value would be affected if the Husband were to cease doing business through the company, start a new business, or choose to retire.
Business Agreements and the Context of Business Operations
Oklahoma case law requires that, in addition to assessing both tangible and intangible business assets, the trial court must take into account the actual increase in the business’s value from the date one spouse became involved in the business. It should also consider any business agreements and the overall context of the business operations when determining the company’s value for equitable division purposes. In Colclasure v. Colclasure, the Oklahoma Supreme Court held that the trial court erred in its valuation of the marital business because it did not consider any loss in the [business’s] value due to Husband’s competing business.”
In Colclasure, the Husband and Wife co-owned a Company, where they both were employed. The Wife was the manager and bookkeeper, while the Husband was a sales representative. A few months into their divorce proceedings, the Husband was terminated from the company. He then started a new company that directly competed with their marital business. The Wife claimed that the Husband used the marital company’s resources to buy books, samples, mobile phones, and transportation for his new business. She also accused him of stealing customers from the marital company and underbidding them on contracts. The trial court ordered the Husband not to use the marital business’s assets for his competing company and prohibited the Wife and Husband from interfering with any and all business operations.
At trial, the Wife’s expert valued the business using the “income method” and an “excess earnings method.” The Wife’s expert based the valuation on the business records and included money that was misdirected, claiming the Husband caused a loss of $ 298,085.58. The Husband presented the testimony of his expert witness, who used a capitalized cash flow method to value the business and did not include any losses due to the Husband’s actions. The trial court valued the company at $480,000 and awarded the Husband $235,200. The Court of Civil Appeals affirmed the trial court’s decision, and the case was appealed to the Oklahoma Supreme Court.
On appeal, the Wife argued that the trial court should have considered loss in value to the marital company because of the Husband’s actions. The Husband countered that they had a business agreement stating the valuation date should be when they started the divorce proceedings, and therefore, any loss in value due to his competing business was irrelevant. Further, the Husband claimed that the parties had a contract that allowed him to start the competing business.
The Oklahoma Supreme Court pointed out that neither Husband nor Wife followed any the provisions of the business agreement, so the business agreement was irrelevant in regards to business valuation. Additionally, the Court pointed out that the trial court was not bound by any valuation date. Most importantly, the Court decided that the Husband was “double-dipping” by using assets from the marital company to start a new business. This fact should have been considered by the trial court when figuring out the loss in value to the marital company.
Conclusion
Navigating the complexities of property division during divorce can be particularly challenging, especially when a marital business is at stake. Accurately valuing a business is no straightforward matter; it often requires the insight of certified experts. Unfortunately, even seasoned experts can sometimes provide misguided valuations, as illustrated by the cases of Colclasure and In Re Marriage of Dorsey. In Oklahoma, the law gives the trial court considerable discretion in determining business value. However, it is crucial to carefully consider both tangible and intangible assets, as well as the broader operational context of the business when presenting a business valuation to the court. Ultimately, the assessment of a business’s value during divorce can have a profound impact on the trial court’s decisions regarding the division of assets, shaping the future for both parties involved.
Consult with an Expert
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