What is a Closely Held Business?
A closely held business is defined as a business entity whose shares are held by only a small number of stockholders. The stockholders typically have a common interest in the company (i.e., family members), and the shares of stock are generally not traded in the public stock market1.
Valuing a Closely Held Business
Determining the value of a closely held business involves many factors and considerations.
Because there is no standard formula for valuing a company whose stock is not actively traded, your lawyer can appoint a valuation expert to help appropriately determine the value of your company.
In the Kowalesky2 case, a Michigan case on the value of closely held businesses, the Michigan Court of Appeals stated that, in determining the value of a closely held business, trial courts may use Revenue Ruling 59-60 if they find it helpful, but they are not required to use that ruling or any other one specific method. There are several methods, or approaches, to valuing a business.
The following factors, found in Revenue Ruling 59-60, from the Internal Revenue Service, are commonly considered in finding value:
- the nature and history of the business
- the economic outlook in general, and the condition and outlook of the specific industry in particular
- the book value and financial condition of the business
- the earning capacity of the business
- dividends and dividend-paying capability
- the existence of goodwill or other intangible value
- previous sales of ownership interests and the size of the block valued
- market prices of businesses engaged in the same or similar line of business, which trade in the open market
Ultimately, the goal of the valuation expert is to determine fair market value of your business. Every case must be evaluated on the unique set of facts. All factors influencing the final value of the company must be carefully examined.
There are three categories regarding “Approaches To Value” in valuing marital business interests:
- the asset
Within each of the approaches listed above, are “methods” in arriving at a value.
When approaching value from an Asset standpoint, the valuation expert will look at book value, liquidation value, and adjusted net asset value.
When approaching value from an Income standpoint, the expert will look at discounted cash flow and capitalization of earnings.
When approaching value from the Market standpoint, the expert will look at reference data regarding sales of similar businesses.
Hiring a good valuation expert may be crucial to your divorce case. A solid, valid opinion of value will be based upon all of the useful facts, common sense, and reasonable conclusions.
Do you have questions regarding “Closely Held Business” and divorce? If so, we’d love to hear from you. The attorneys at Lakeshore Law & Mediation are dedicated to providing you guidance with all legal aspects of your divorce, so you can focus on moving forward. Contact us today!