Valuation Insights:[OCTOBER 2003]

Why are Businesses Appraised

BUSINESSES ARE APPRAISED FOR A VARIETY OF REASONS, but an Ohio Court of Appeals made it clear that the valuation of a business must be supported by expert testimony. In Tracy Kelly v. Kimberly Kelly (URL address below) neither party provided expert testimony as to the value of the husband's photography business, but both husband and wife opined during trial as to the value of the business, apparently providing limited support for their opinion. The trial court concluded as to value and wife appealed. The appellate court recognized that each party could opine as to value, but ruled that neither did. Despite this, the trial court reached a conclusion of value. The appellate court remanded the valuation issue, stating that the trial court "could perform its statutory charge to divide marital assets equally only by appointing a qualified, independent appraiser to provide the court a report on which it could rely".

In addition to the prospect of the need for an expert opinion in litigation, businesses need to be appraised for a variety of important reasons.

Marital Dissolutions - At the end of a marriage, the couple's assets are valued and distributed. Often, there is an interest in a business that needs to be valued. Since this is a state action, the appraiser must be aware of state law.

Pre-Nuptial Agreements - Sometimes before a couple ties the knot, one party wishes to protect an asset. This asset is sometimes an interest in a business. Since a pre-nuptial agreement requires full disclosure, the business interest needs to be valued.

Estate and Gift Taxes - When preparing an estate tax return for a decedent, all assets and liabilities need to be listed and valued, either at the date of death or using the alternative valuation date. One or more of the decedent's assets might be an interest in a business. The valuation of a business is important to the estate planner when deciding to gift interests in businesses.

Selling or Acquiring a Business - A business owner at some time might consider selling his business, merging his business or purchasing a business. Most business owners know their business, but they do not know what it is worth.

Buy-Sell Agreements - A business appraiser would be of great assistance to an attorney drafting a buysell agreement. The appraiser can provide insight on whether a formula, a designated price or an annual business appraisal is appropriate.

Shareholder or Partner Disputes - As with married couples, business partners or shareholders often go their separate ways. In this instance, the business is appraised and a shareholder interest is determined in accordance with state law.

Economic Damage Claims - A business valuation is often helpful when compensation is a remedy for patent infringements, breaches of contracts, lost profits, discrimination and wrongful death actions.

Employee Stock Ownership Plan (ESOP) - Companies that maintain Employee Stock Ownership Plans need to have Company shares valued on an annual basis to value shares included in the ESOP.

URL for Tracy Kelly v. Kimberly Kelly -