Opinion ID: 1699853
Heading Depth: 3
Heading Rank: 1

Heading: Valuation of the Family Business.

Text: Minn.Stat. § 518.58 (1986) provides that when a marriage is dissolved, the court shall make a just and equitable division of the marital property of the parties. Notwithstanding the common law's somewhat cynical reference to the length of the chancellor's foot, [1] equity denotes fairness and requires the application of the dictates of conscience or the principles of natural justice to the settlement of controversies. Hence, the statutory mandate requiring the courts to consider all relevant factors in making the division: The court shall base its findings on all relevant factors including the length of the marriage, any prior marriage of a party, the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, needs, opportunity for future acquisition of capital assets, and income of each party. The court shall also consider the contribution of each in the acquisition, preservation, depreciation or appreciation in the amount or value of the marital property, as well as the contribution of a spouse as a homemaker. It shall be conclusively presumed that each spouse made a substantial contribution to the acquisition of income and property while they were living together as husband and wife. Minn.Stat. § 518.58 (1986). On reviewing this record, we are reminded that the art of advocacy, which prevailed when the trial court adopted verbatim Ralph's proposed findings and conclusions, is not nearly as well-suited to the resolution of family disputes as is the art of compromise. When the parties cannot agree on a division of the marital property, just and equitable division of an asset included in the marital property of the parties can be accomplished in one of three ways: (1) If the asset is readily divisible, the court can divide the asset and order just and equitable distribution in kind; (2) the court can order the sale or liquidation of the asset and make a just and equitable division of the proceeds of sale or liquidation; or (3) the court can determine the value of the asset, order distribution of the entire asset to one of the parties, and order the recipient to pay to the other spouse a just and equitable share of the value of the asset. Whatever the method, the goal is to place both parties in the optimum position. The choice of methods usually depends on the type of asset to be divided. While the first method may be an eminently suitable way to divide the shares of a publicly owned corporation, it is an unlikely choice if the corporation is closely held. The second method has the advantage of certainty and may be necessary for equitable division when an indivisible asset constitutes the bulk of the marital property. Sale or liquidation of a family-owned business may be appropriate if, for example, the parties are at or near retirement age or the dissolution of the marriage may adversely affect the business. The third method, which is in essence a forced sale by one spouse to the other in which the court sets the selling price and the terms of payment, has the greatest potential for error and unfairness, particularly where the asset is the major marital asset. It is the third method of division which gives rise to this appeal. The principal bone of contention here, as well as in the earlier stages of these proceedings, is the value and disposition of the parties' principal asset: the family business. The book value of Nardini of Minnesota at December 31, 1984 was $565,598. The corporation held cash and cash equivalents totalling more than $100,000 and its net accounts receivable exceeded $300,000. Absent an unnoted change in accounting methods, inventory was carried at the lower of cost (first in  first out method) or market. Current liabilities, including current installments of long term debt, were less than $80,000. The consultants' estimates of the market value of Nardini of Minnesota varied from $725,000 to $350,000. The one consultant also testified that the value of a one-half interest in the common stock of the corporation must be reduced from $175,000 to $135,135 to reflect a lack of control. While we are cognizant of the difficulty and the imprecision of valuing a closely held corporation, nevertheless it is apparent that a valuation which assumes that either Marguerite or Ralph would be willing participants in a sale of Nardini of Minnesota to a third party for a price of $270,270  a sum no greater than the corporation's cash and cash equivalent, Ralph's annual salary and benefits and one year's net corporate income  is unrealistic. First, for purposes of valuing marital property, there is no justification for discounting an undivided interest in a corporation all of whose shares are owned by one or both spouses. Although shares may be transferred from one spouse to the other, whenever the court is called on to value a business, neither any corporate asset nor any fraction of the shares of the corporation will actually be sold to an outsider. Generally, as occurred here, the corporate shares are awarded to the spouse more actively engaged in the business of the corporation, and the management and operation of the business continue essentially unchanged. In this context the establishment of a fair market value contemplates nothing more than the assignment of a fair and reasonable value to the family business as a whole to allow equitable apportionment of the marital property. Second, Ralph's appraiser testified that the amount which could be realized by liquidating the corporation significantly exceeded its market value as a going business. Nevertheless, the trial court adopted the lesser value, which it further discounted for lack of control. The value of a family business as marital property cannot be less than a sum equal to the net proceeds which could be realized from the forced sale of the tangible assets of the business and the collection or assignment of intangibles such as accounts receivable, and after payment of all liabilities. If the corporation is to continue in operation under the management of one of the owner-spouses even though the liquidation value of the business is greater than its value as a going business, assigning the corporation the lesser value as a going business patently disadvantages the spouse who must relinquish his or her interest in the corporation and unfairly benefits the spouse to whom the marital interest in the corporation is awarded. Moreover, inasmuch as Nardini of Minnesota is a thriving and vital corporation with cash and cash assets in excess of liabilities, the worst-case scenario suggested by down and dirty liquidation is not a suitable measure of market value. [2] While the relinquishment of his or her interest in the family business is in effect a forced sale, the court must determine the value of the business as if the transaction were a sale of the entire business by a willing seller to a willing buyer. There is, of course, no universal formula for determining the value of a closely held business. No matter how experienced and objective the appraiser, the valuation of a business is an art, influenced by various subtle and subjective factors. While book value may be an appropriate starting point in valuing a business such as Nardini of Minnesota, with its high liquidity and modest investment in machinery and equipment, whatever the starting point, other factors, such as the following, must be taken into consideration before a reasonable valuation can be made: 1. The nature of the business and the history of the enterprise from its inception. 2. The economic outlook in general and the condition and outlook of the specific industry in particular. 3. The book value of the stock and the financial condition of the business. 4. The earning capacity of the company. 5. The dividend-paying capacity. 6. Whether or not the enterprise has goodwill or other intangible value. 7. Sales of the stock and the size of the block of the stock to be valued. 8. The market price of stocks of corporations engaged in the same or a similar line of business having their stocks traded in a free and open market. [3] In any case a sound valuation requires not only the consideration of all relevant facts but also the application of common sense, sound and informed judgment, and reasonableness to the process of weighing those facts and determining their aggregate significance. [4] Viewed in the light of the foregoing principles, it is apparent that by failing to take into consideration the relevant facts and the fundamental factors appropriate for use and analysis in the value of a closely held corporation, the trial court abused its discretion. We remand for determination of the fair and reasonable value of Nardini of Minnesota in accordance with the principles enunciated in this opinion.