Federal Reserve Policy, Skyrocketing Interest Rates and Prospects of Recession: The Impact on the Valuation of a Closely Held Business.

The valuation of a closely held business is a complex issue, particularly when the valuation process arises in the context of a divorce proceeding. The complexity arises because the ownership in the business is not publicly traded and valuation relies on a number of factors and careful evaluation by a skilled appraiser. It is customary to use a forensic accountant who is certified as a business valuation appraiser to value a closely held company. The American Institute of Certified Public Accountants promulgates standards for valuation services and forensic accountants are obliged to adhere to these standards. The valuation is most certainly fact sensitive and will “depend[] upon the experience of the appraiser and the completeness of the information upon which his conclusions are based.” Bowen v. Bowen, 96 N.J. 36, 44 (1984) quoting Lavene v. Lavene, 162 N.J. Super. 187, 193 (Ch. Div. 1978) (on remand from 148 N.J. Super. 267); see also Steneken v. Steneken, 183 N.J. 290, 297-98 (2005). In New Jersey the courts will look to the reasonableness of the valuation method in determining whether the valuation is admissible. Steneken, 183 N.J. at 297. The courts should consider “‘proof of value by any techniques or methods which are generally acceptable in the financial community and otherwise admissible in court.’” Balsamides v. Protameen Chemicals, 160 N.J. 352, 375 (1999). The guiding principle in determining the value of a closely held business, in the context of a divorce, is to reach a fair value and subsequently a just division of the asset. See Steneken, 183 N.J. at 299.

Typically the valuation is determined as of the date of the filing of the complaint for a divorce. Equity generally requires that the parties value marital assets as of a common date. Bednar v. Bednar, 193 N.J. Super. 330, 332 (App. Div. 1984). However, the court in Bednar also held that the valuation of an asset at the time of trial is also permissible, depending on the nature of the asset and compelling equitable considerations. Id. While Bednar was unquestionably an important case in the development of the valuation law, it lacked a detailed easy-to-apply bright-line for practitioners and the trial courts. Scavone v. Scavone, 230 N.J. Super. 482 (Ch. Div. 1988) aff’d 243 N.J. Super. 134 (App. Div. 1990) provided the needed clarification for differentiating separate and marital assets and whether the appreciation on a particular asset was active or passive. Active assets, such as a business, are generally to be valued at the date of complaint. The reasoning is that an active asset’s increase or decrease in value is a direct result of the attention, time, and efforts of the owner during the marriage. Id. at 491-92. The value of passive asset, on the other hand, will rise or fall regardless of the owner’s efforts as it is exclusively dependent on market factors. Id. However, there are situations that occur, that require a deviation from these general rules. In Goldman v. Goldman, 248 N.J. Super. 10 (Ch. Div. 1991), aff’d in part, rev’d in part, 275 N.J. Super. 452 (App. Div. 1994), the Appellate Division addressed the continuing evolution of asset valuation.