How Businesses Are Valuated in Massachusetts Divorce Cases
In Massachusetts divorce proceedings, the valuation of a business interest can be one of the most complex and contentious aspects of property division. Whether the business is a small sole proprietorship, a professional practice, or a larger closely held corporation, determining its fair value requires careful analysis and often specialized expertise.
The Legal Framework for Business Valuation in Divorce
Massachusetts law is clear that a spouse’s ownership interest in a business, regardless of its size or value, constitutes a marital asset subject to division under Massachusetts General Laws Chapter 208, Section 34. This statute establishes that a party’s “estate” includes all property to which they hold title, however acquired. The Supreme Judicial Court has consistently upheld this principle in cases such as Dalessio v. Dalessio (409 Mass. 821, 1991) and Drapek v. Drapek (399 Mass. 240, 1987).
When dividing business assets, Massachusetts courts typically attempt to keep the business intact by allowing the owner-spouse to retain their interest while providing the non-owner spouse with other assets of equivalent value. Alternatively, the court may order the business-owner spouse to make a lump-sum payment or a series of installment payments over a reasonable period to compensate the non-owner spouse for their share of the business value.
Determining the Valuation Date
The date of valuation is a critical factor in business valuation. Generally, Massachusetts courts value the marital estate as of the date of the divorce trial. However, the court has discretion to use a different date if justified by the specific circumstances of the case.
In some instances, the court may use the date of separation if evidence shows that the parties’ “marital relationship” ended at that time. This typically occurs when the parties no longer hold themselves out as a married couple and have no further marital relationship after separation.
However, the marital relationship may be deemed to continue past the date of separation if a spouse continues to receive post-separation financial benefits resulting from the parties’ collective efforts in the business prior to separation, as established in Moriarty v. Stone (41 Mass. App. Ct. 155).
Methods of Business Valuation in Massachusetts
Massachusetts courts recognize several methods for valuing businesses in divorce proceedings. The appropriate method depends on the nature of the business, available financial information, and specific circumstances of the case.
Capitalization of Earnings Method
The capitalization of earnings method is one of the most commonly used approaches in Massachusetts divorce cases. This method has been applied in numerous important decisions, including Bernier v. Bernier (449 Mass. 774, 2007) and Sampson v. Sampson (62 Mass. App. Ct. 366, 2004).
Under this approach, the actual earnings of the business are divided by a capitalization rate to arrive at an overall value. The capitalization rate reflects the risk associated with the business and expected future growth. This method is particularly useful for established businesses with a history of stable earnings.
Discounted Cash Flow Method
The discounted cash flow method projects future earnings and then discounts them to present value. This approach is particularly appropriate for valuing partnership interests, as recognized by the Supreme Judicial Court in Adams v. Adams (459 Mass. 361, 2011).
This method considers the time value of money and accounts for the risk that projected future earnings may not materialize. It is especially useful for businesses with fluctuating or growing earnings.
Other Valuation Methods
Massachusetts courts have supported various other valuation methods, including:
- Enterprise value method, which determines value by examining the company’s ability to generate cash flow and applies a multiplier based on comparable companies
- Stockholders’ equity method, as used in Zatsky v. Zatsky (36 Mass. App. Ct. 7, 1994)
- Net book value of the corporation’s stock, applied in Robbins v. Robbins (19 Mass. App. Ct. 538, 1985)
- Valuation based on the amount for which assets were insured, as seen in Ross v. Ross (50 Mass. App. Ct. 81)
- Averaging the two parties’ calculations of value, which courts have discretion to do according to Kittredge v. Kittredge (441 Mass. 28, 2004)
The Role of Experts in Business Valuation
Expert testimony is typically essential in business valuation cases. In Adams v. Adams (459 Mass. 361, 380-81), the court emphasized that valuation of a business interest is a question of fact, and when experts’ opinions diverge, a judge may accept one reasonable opinion and reject the other.
Qualified experts in Massachusetts divorce cases may include:
- Certified public accountants
- Business valuation specialists
- The business’s chief financial officer
- In some cases, the business-owner spouse, if they have sufficient knowledge about the business
- Court-appointed special appraisers
The expert’s role is to provide a comprehensive method and formula for valuation and justify why their approach is more appropriate than alternative methods. The court has discretion to accept or reject expert opinions in whole or in part, or even to average conflicting experts’ assessments.
Special Considerations in Business Valuation
The Bernier Standard: Fair Value Between Fiduciaries
The Supreme Judicial Court’s decision in Bernier v. Bernier (449 Mass. 774, 2007) significantly altered traditional business valuation methodology in Massachusetts divorce cases. The court established what has been called “fair value between fiduciaries” as the appropriate standard, stating that judges must “take particular care to treat the parties not as arm’s-length hypothetical buyers and sellers in a theoretical open market, but as fiduciaries entitled to equitable distribution of their marital assets.”
This standard affects how discounts are applied in business valuations. For example, marketability discounts (which reduce value based on the difficulty of selling a business interest) are generally inappropriate unless there is evidence that the business will actually be sold.
Minority and Marketability Discounts
When a spouse owns a minority share of a business, courts have sometimes applied percentage discounts based on the premise that a minority interest would be less desirable and harder to sell than a majority interest.
However, following Bernier, courts are more cautious about applying such discounts. In Caveney v. Caveney (81 Mass. App. Ct. 102, 2012), the court held that it is improper to utilize a minority discount or a lack of marketability discount when valuing a party’s interest in a closely held business unless there is evidence that the business will be sold or extraordinary circumstances warrant such a discount.
Owner Compensation and “Double Dipping”
A particular challenge in business valuation is distinguishing between the business’s value and the owner’s compensation. This issue often arises in professional practices and sole proprietorships where the owner’s personal efforts significantly contribute to the business’s success.
Massachusetts courts have recognized the concept of “double dipping,” which occurs when a business is included in the division of assets and its income is also used to determine support obligations. While courts acknowledge this concern, they have not established a bright-line rule prohibiting such “double dipping.”
In Champion v. Champion (54 Mass. App. Ct. 215, 2002), the Appeals Court rejected the argument that including a sole proprietorship in asset division precludes using that same business for income/support purposes. However, in Adams v. Adams (459 Mass. 361, 394, 2011), the Supreme Judicial Court suggested that Probate and Family Courts should make efforts to avoid “double dipping” when possible.
Practical Considerations for Business Owners
For business owners facing divorce in Massachusetts, several practical considerations can help protect their interests:
Financial Statements and Discovery
Massachusetts Supplemental Rule 401 requires parties to file financial statements disclosing all assets, including business interests. When listing a business interest, it is inappropriate to describe its value as “uncertain” or “unknown” without a detailed explanation and supporting documentation such as tax returns and balance sheets.
Comprehensive discovery is essential in cases involving business valuation. This may include requests for production of documents, interrogatories, and depositions of relevant parties, including business partners or financial officers.
Protecting Business Continuity
Courts generally prefer to keep businesses intact rather than forcing their sale or division. This preference allows business owners to maintain operational continuity while compensating the non-owner spouse through other means.
To facilitate this approach, business owners should work with their attorneys to identify other assets that could be used to offset the value of the business, or to develop a reasonable payment plan if insufficient assets exist for an immediate offset.
Planning for Valuation Challenges
Business owners should anticipate potential challenges to their valuation position. This includes understanding the strengths and weaknesses of different valuation methods as they apply to their specific business and being prepared to address claims about personal goodwill, retained earnings, or other complex valuation factors.
Conclusion
The valuation of businesses in Massachusetts divorce cases involves complex legal, financial, and practical considerations. There is no one-size-fits-all approach, as courts have discretion to apply various valuation methods based on the specific circumstances of each case.
For business owners and their spouses, understanding the valuation process and working with experienced professionals is essential to achieving a fair outcome. At Weberg Law, we help clients navigate these complex issues by providing knowledgeable guidance throughout the divorce process.
For more information about the statutory framework governing property division in Massachusetts divorce cases, you can review Massachusetts General Laws Chapter 208, Section 34, which provides the legal basis for equitable distribution of marital assets, including business interests.