PAUL J. DeBAST & KIMBERLY A. QUACH April 27, 2012 OREGON AMERICAN ACADEMY OF MATRIMONIAL LAWYERS SPRING CLE Guided Tour of Your New OSB Family Law CLE Deskbook: What Every Good Divorce Lawyer Needs to Know About Business Valuation

Albert Einstein (Thoughts on Business Valuation) “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”

Hypothetical #1 Standards of Value Assume you represent wife in a long term marriage. Husband’s owns a 10% interest in a closely held manufacturing business which also owns extensive real estate not used in the business. In a few years it is likely the extra real estate will be sold resulting in millions of dollars available for distribution to shareholders. Husband’s expert will testify that the value of husband’s interest must be reduced by 70% for minority, marketability and capital gain discounts. What alternatives are available to wife’s lawyer in refuting such huge discounts?

Standards of Value Fair Market Value -- “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the facts.” Treas Reg §1.17A-1(c)(1). Fair Value – used in dissenting shareholder lawsuits. Investment Value – specific value of a business to a particular investor. Liquidation Value – net amount that can be realized from the sale of an asset. Intrinsic Value – investment value to the holder of the business. Book Value – the value of the business on the balance sheet. “Divorce Value” – not yet defined in Oregon; varies from state to state.

Different Perspectives on Value

Sale of Business is Best Method

Other Indicia of Value Offers to Purchase – very persuasive evidence of value. Buy/Sell Agreements – unclear impact, depending on whether the agreement can be enforced by the shareholder. Gibbons and Gibbons, 194 Or App 257, 94 P3d 879 (2004). Loan Applications – evidence for the court to consider.

Discounts Minority/Control Discount – “[A] marketability discount addresses the degree of liquidity of the interest. Such discounts compensate for the lack of a recognized market for a particular stock, lack of ready marketability, or restrictive provisions affecting ownership rights or limiting sales.” Tofte and Tofte, 134 Or App 449, 456 n 3, 895 P2d 1387 (1995) Marketability Discount – “takes into account the relationship between the interest being valued and the total enterprise. A primary factor in determining the value of a minority interest is the degree of control that the owner either does or does not have within the corporation.” Id. Distinct Discounts -- Often not distinguished by lawyers and jurists.

Summary of Reported Decisions on Discounts % OwnershipDiscount Barlow and Barlow, 111 Or App 179, %25% Belt and Belt, 65 Or App 606, 608, %50% Gibbons and Gibbons, 194 Or App 257, %75% Reiling and Reiling, 66 Or App at %25% Tofte and Tofte, 134 Or App 449, 452, %30% Tripineras and Tripineras, 185 Or App 283, 286, %25% Webber and Webber, 99 Or App 703, %0%

Valuation Methodologies Net Tangible Asset Approach –  Can be coterminous with book value approach;  Has been held inappropriate unless business will be liquidated. Market Approach – where the similarities are significant, the approach is approved. Income Approach – the preferred approach when the business is a going concern. Has been used in several reported decisions.

Goodwill – Slater and Slater Slater and Slater, 240 Or App 30, 245 P3d 676 (2010), rev den, 350 Or 408 (2011) Business Goodwill (Enterprise Goodwill) -- “the intangible assets of a business, such as its relationships with suppliers, customers, and employees, as well as its location, name recognition, and reputation that engender customer loyalty regardless of who works there.” Id. at 38 (citing Christopher A. Tiso, Present Positions on Professional Goodwill: More Focus or Simply More Hocus Pocus?, 20 J Am Acad Matrimonial L 51, 52 (2006)). Personal Goodwill -- “the increased earnings capacity of a business attributable to an individual’s (often the principal’s) skills, efforts, personality, or reputation.” Id. at (emphasis in original; footnote omitted).

Personal Goodwill

Covenants Not To Compete The court cannot assume that the spouse awarded a business will enter into a covenant not to complete when valuing the asset. Rationale – places a lien on future earnings. Practice Tip -- expert can attest to the value of the covenant not to compete and remove it from stated opinion of value.

Hypothetical #2 Should a broker’s estimate of value for a privately held business interest be given more credibility than a traditional business valuation expert’s estimate of value?

Hypothetical #3 Tax Discount Should the Court be entitled to tax discount the equalizing judgment owed as a result of the marital business’ value when the spouse awarded the business owner/spouse will have no option but to pay the judgment from after-tax earnings produced by the business?

Tax Considerations (1)(e)(G) -- Whenever the court renders a judgment of marital annulment, dissolution or separation, the court may provide in the judgment: For the division or other disposition between the parties of the real or personal property, or both, of either or both of the parties as may be just and proper in all the circumstances. * * * (G) In arriving at a just and proper division of property, the court shall consider reasonable costs of sale of assets, taxes and any other costs reasonably anticipated by the parties. Tax considerations appropriate when dividing business assets -- redemption of shares more sensible because business owner spouse avoids taxes, and structure of purchase does not impact other spouse. Haguewood and Haguewood, 292 Or 197, 209, 638 P2d 1135 (1981). Origin of funds used to pay equalizing judgment for business interest – even if from earnings only -- not relevant. Rodenbeck and Rodenbeck, 246 Or App 449, 454, 266 P3d 162 (2011).

Rodenbeck and Rodenbeck 246 Or App 449, 454, 266 P3d 162 (2011). Long-term marriage – over 20 years Husband 50% interest holder in Software Solutions Unlimited, Inc. Valuation dispute ensued – Wife’s expert Jay Sickler and Husband’s expert Greg Gilbert Trial before Reference Judge John Lewis occurred over several days and Greg provided different values. Relied upon earnings forecast of Husband’s brother/business partner On de novo review, Court of Appeals reversed trial court’s conclusion that Husband’s interest was worth $2,572,826, instead determining the value was $3,519,000. Husband argued only way he could pay the equalizing judgment was from after-tax earnings Although husband argued the tax discount issue was not preserved, Court of Appeals determined that it was permitted to consider the issue because it reversed the trial court’s valuation finding.

Thank You