Soshnick: Market approach in divorce valuation: Choices and more choices

The market approach is a commonly applied approach to business and professional practice valuations in divorce. Unlike the income approach, which relies on company-specific economic data, and the asset approach, which focuses on book value, the market approach relies on reported public and private market transactions. Is the market approach reliable? It depends on the data.

In order to understand the market approach to valuation, a refresher on some basic definitions from the International Glossary of Business Valuation Terms is useful. Recall that “Premise of Value” is an assumption regarding the most likely set of transactional circumstances that may be applicable to a valuation — most often “going concern” or ongoing business operations. “Standard of Value” is the identification of the type of value being utilized in a specific engagement. Also recall that the standard of value in Indiana divorce cases is “fair market value.” See, e.g., Eyler v. Eyler, 492 N.E.2d 1071 (Ind. 1986); Houchens v. Boschert, 758 N.E.2d 585 (Ind. Ct. App. 2001); Nowels v. Nowels, 836 N.E.2d 481 (Ind. Ct. App. 2005); Alexander v. Alexander, 927 N.E.2d 926 (Ind. Ct. App. 2010); Crider v. Crider, 15 N.E.3d 1042 (Ind. Ct. App. 2014); Hartman v. BigInch Fabricators & Constr. Holding Co., 161 N.E.3d 1218 (Ind. 2021) (defining “fair market value” as “the price that a seller is willing to accept and a buyer is willing to pay on the open market in an arm’s length transaction”). These authorities parallel Internal Revenue Service Revenue Ruling 59-60, which provides, in part, that “fair market value” is “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

As noted above, valuation professionals in Indiana divorce cases must consider three valuation approaches: asset, income and market. See, e.g., AICPA Statement on Standards for Valuation Services No. 1 paragraph .31; Uniform Standards of Professional Appraisal Practice. See also Kakollu v. Vadlamudi, 175 N.E.3d 287 (Ind. Ct. App. 2021). While all three approaches must be considered, the valuation professional applies the approach or approaches appropriate for the valuation engagement. SSVS paragraph .32. The “Market Approach” is defined in the International Glossary of Business Valuation Terms as a general way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses’ business ownership interests, securities or intangible assets that have been sold. One commonly used method is the “Guideline Public Company Method,” or GPC method, whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market. See, e.g., SSVS paragraph .36. Another commonly used method is the “Merger and Acquisitions Method” or “Guideline Company Transactions Method” (GCT method) whereby pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business. Id. Each of these methods is reliant on qualitative and quantitative comparisons and relevant market data. SSVS paragraph .37.

The GPC method looks for reasonably comparable companies by identifying applicable Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS) codes and reviewing databases such as S&P Capital IQ, Thomson ONE, FactSet, BVR Guideline Public Company Comps and Mergent Online for primarily public transactions. The GCT method reviews databases such as DealStats (formerly Pratt’s Stats), BIZCOMPS, Thomson ONE, FactSet Mergerstat, Capital IQ and Bloomberg for private transactions. Then, valuation experts perform procedures under the applicable methods. The analysis is only as good as the data because not all transactions are reported publicly or in databases. Also, valuation experts, in addition to choosing the databases to review and comps to apply, exercise considerable professional judgment in selecting pricing multiples and adjusting for size, geography and a variety of other factors. Suffice it to say, valuation conclusions are highly dependent on the reliability of the data selected for comparison purposes. With this variable in mind, how does Indiana view the market approach in divorce cases?

The Court of Appeals of Indiana first expressly recognized use of the market approach in a divorce case in Nowels. The husband owned a 50% interest in a lumber company, and his valuation expert weighted the income approach 60% and the market approach 40% in reaching an $818,000 conclusion of value. The wife’s valuation expert applied only the income approach in reaching a $3,550,00 conclusion of value. The trial court found the husband’s expert’s valuation “completely unrealistic,” uncovered deficiencies in the wife’s expert’s valuation and valued the business at $2,500,000, which was affirmed on appeal.

Shortly thereafter, Balicki v. Balicki, 837 N.E.2d 532 (Ind. Ct. App. 2006), involved competing expert testimony in the valuation of two businesses, one owned 50% by the wife and one owned 50% by the husband. In awarding the wife’s 50% business interest to the husband and adopting a value close to what the wife desired, the Indiana Court of Appeals observed that one of the three valuation experts, using a blend of the market and income approaches, explained in a report that “(T)he notion behind the marked approach [is to] provide objective evidence as to values at which investors are willing to buy and sell interests in companies in that industry.” Id. at 537. A second expert agreed with the approaches and methods but disagreed with the application by the first expert, adjusting the first appraiser’s $300,000 valuation to $433,000. The trial court adopted a $400,000 conclusion of value, in the process rejecting the third expert’s $145,000 conclusion of value, and the Court of Appeals affirmed. See also Bringle v. Bringle, 150 N.E.3d 1060 (Ind. Ct. App. 2020) (recognizing an undisputed $1,050,000 conclusion of value of a business interest based on a combination of the market and income approaches); Adewopo v. Jaja, 182 N.E.3d 888 (Ind. Ct. App. 2022) (an unpublished decision that also accepts a trial court’s adoption of a $730,000 business value based on a combination of the market and income approaches).

A little less than a decade after Balicki, a market approach conclusion of value was validated. Weigel v. Weigel, 24 N.E.3d 1007 (Ind Ct. App. 2015), considered the valuation of a hoof trimming business. The valuation expert valued the business at $45,300 under the market approach and $184,000 under the income approach. The trial court adopted the $45,300 market approach conclusion of value, and the Court of Appeals affirmed.

As with the income approach, Indiana divorce courts recognize and have accepted the market approach to business and professional practice valuations. How reliable a conclusion of value under this approach is depends on the methods applied, the databases and comps selected, and the exercise of appropriate professional judgment by the valuation professional.•

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Andrew Z. Soshnick is a partner in the Indianapolis office of Faegre Drinker Biddle & Reath LLP. He is a past chair of the Indiana State Bar Association Family & Juvenile Law and Indianapolis Bar Association Family Law sections, a diplomate of the American College of Family Trial Lawyers, and a fellow of the American Academy of Matrimonial Lawyers and International Academy of Family Lawyers. Opinions expressed are those of the author.