A recent Appeals Court decision addressed what level of evidence is required to demonstrate business value in a divorce proceeding. In Hugh v. Hugh, 2014, the wife in a divorce proceeding filed a cross-appeal on a number of issues, including the trial court’s failure to value her husband’s business (“E-Tech”). The Appeals Court agreed that while the husband had effectively “stonewalled” discovery, the Trial Court had the ability and obligation to make a value determination based on the available evidence.
The available evidence regarding E-Tech came from the husband. The husband’s testimony was described as “vague, indefinite, and confusing” and accompanied documentary evidence that was “scant and indefinable”. He testified that to him, E-Tech was worth nothing. In contrast, the wife’s expert, a certified public accountant (the “CPA”) analyzed the available information and concluded that E-Tech had an intrinsic value of $1.4 million based on a market approach to value.
The Trial Court concluded that it had “insufficient evidence upon which to place a value on [E-Tech]”, a troubling finding that seemed to reward the husband’s “stonewalling” in discovery. But an Appeals Court reversed that decision, stating :
“While the parties have the burden of bringing forth sufficient evidence for the trial court to base its award, where there is sufficient and credible evidence as to the value of a business, a trial court must assign a value to the business when making its equitable distribution award. There is no precise approach to the valuation of a business. Rather, courts have adopted a flexible approach that allows for consideration of the individual circumstances in each case. To that end, the type or quantity of evidence required to enable a trial court to value a business is not fixed….The trial court in this case had a relative wealth of information regarding E-Tech from which it could have valued the business….[The CPA] employed the market approach to value E-Tech, which he described as a “sound and reasonable method to value a closely-held business”….Even though the trial court had understandable doubts as to husband’s credibility, as well as the professionally limited basis for [the CPA]’s testimony, in addition to questioning the credibility of the various tax returns, the trial court was nonetheless confronted with sufficient information from which to value E-Tech. As the Court stated in Collins, “[a]ssuredly, a business that has gross income can be valued.” In this case, the trial court had more than gross income as evidence of E-Tech’s intrinsic value and had the discretion to place a value within the range provided in witness testimony and documents received into evidence. Therefore, we hold that the trial court erred when it did not value and distribute E-Tech.” [citations omitted]
A related article contains additional information regarding this case and the valuation of a business with limited evidence.