Most people work as “W2” or “1099” employees. “W2” type divorces are among the easiest to figure out as all of a person’s earnings are accounted for. A 1099 is slightly difficult as a “1099” contractor has the ability to offset income as expenses associated with his or her work. While we handle these cases in family court, we also handle more complex matrimonial litigation involving complex assets and closely held businesses. There are many factors involved in determining the value of a small business or partnership. The New Jersey Supreme Court has ruled that there is no single formula to apply to each type of enterprise (Dugan v. Dugan 1983). Each business in each case presents a different factual basis that needs specific attention as to how to determine the value. In Bowen v Bowen, the Court indicated that the reasonableness of a valuation depends on the appraiser and that appraiser’s judgment, experience and information provided, there is no exact science.
First, does the business have goodwill? For example, an entertainer’s celebrity status is considered an asset subject to equitable distribution. If a business has a “strong name” known for its quality product or service that the name itself helps generate revenue and income, the business may have goodwill. This enhanced reputation leads to prospective earnings and potential clients. There is a value to be determined if your business fits in this category. In Dugan, business goodwill has been determined to be: “the total of all the special advantages, not otherwise identifiable, related to a going concern, including a good name, capable staff and personnel, high credit standing, reputation for superior products and services, and favorable location.
If you have a professional practice, the Court seeks to determine if there is “professional goodwill.” This topic has gained attention throughout the United States. In Stern v. Stern, a partner of a law firm was deemed to have professional goodwill. The Court used a presumptive value of the amount of money his estate would receive should he die from the law firm and the amount appearing after the partner’s name on a schedule appended to the partnership agreement, which was revised quarterly. This value was and is subject to challenge by either side in the case. In another case dealing with this issue, Levy v. Levy, the Supreme Court ruled that the goodwill of a law practice was determined by comparing the amount the attorney’s earnings exceeded that earned by someone with a similar educational and professional background. This would then be subject to a capitalization factor.
The IRS has also issued a ruling under Revenue Ruling 59-60 to help determine the value of a closely held business. The factors that the IRS indicates require analysis are:
- The nature of the business and the history of the enterprise from its inception
- The economic outlook in general and the condition and outlook of the specific industry in particular
- The book value of the stock and the financial condition of the business
- The earning capacity of the company
- The dividend-paying capacity
- Whether there is goodwill or other intangible value
- Sales of the stock and the size of the block to be valued
- Market price of stocks of corporations engaged in the same or similar line of business having their stocks actively trade in a free and open market, either on an exchange or OTC.
Other key elements in the valuation are: the book value, capitalization of earnings, buy-sell agreements, fair value or fair market value, discount for minority interest. After that what is key is how to distribute the value without losing the company or losing your share.
Divorce is rarely easy even with W2 or 1099 individuals as divorces can be very emotional. When valuations are needed and businesses are on the line, it is important to work with people that understand finance and the business climate. Our team is experienced in working with business owners, executives, athletes and other successful people in divorces throughout New Jersey including: Morris, Hudson, Bergen, Essex, Union and Middlesex Counties in New Jersey. To discuss your case and setup an appointment in our Jersey City office, contact us on 201-706-7012 or on 201-706-7910.