In re Cole, 548 B.R. 132 (2016)

When valuing a business, “there are different standards of value depending on the purpose of the valuation being completed,” Denny Taylor explained. “You can rarely re-use an existing business valuation report. Not only does the value of a business change constantly over time, but the value also may be different depending upon the use of the report. Such was the case involving the valuation of a dentist’s business.”

The Situation

A dentist and his wife were getting a divorce. The husband (the dentist) owned 25% of a dental practice. In order for him to get out of his interest in the practice, he needed to have the other shareholders buy him out. Their agreement used a formula to determine how much they would have to pay to buy out his shares. As in any divorce, the holdings of either party need to be valued and divided according to the law.

The dentist’s wife engaged a valuation expert, who valued the husband’s share of the business to be $212,000, 25% of the whole. The expert included the value of the patients’ records and the practice’s goodwill and determined the investment value of the practice based upon what other dentists would be willing to pay for that practice. The dentist engaged a different valuator, who arrived at a value of $15,800. The dentist’s expert did not consider goodwill or patient records in his valuation. When the case went to trial, the court ruled in favor of the wife and accepted her valuator’s claim of $212,000.

The Game Changed

Three months later, the dentist filed for bankruptcy. He listed the value of his share of the corporate dental practice at $15,800. In court, his expert witness claimed the dental practice corporate stock actually had no value because no one would buy it on the open market if the business were being liquidated under Chapter 7 rules. In that case, creditors would receive a percentage of the value of their shares, which in Chapter 7, the valuator estimated would be zero.

The dentist’s wife argued that the valuation made by the divorce court should stand, not the much lower value argued in bankruptcy court. “In the wife’s case, the court valued intangibles that were of value. Dental practices are bought and sold all of time and include the value of patient lists and goodwill in their valuations,” Denny Taylor said. “Would the dentist have given up the stock for anything less than the intrinsic, or investment value? Not likely.”

The Court’s Decision

The bankruptcy court rejected the divorce court’s valuation, noting that, for bankruptcy purposes, the market value of the stock differed from its intrinsic value or investment value in divorce. The court also rejected the dentist’s value of $15,800, finding that if the stock had faced liquidation, it would produce a much higher value. A Chapter 7 trustee, the court found, could force the remaining owners to buy the dentist out at a much higher value of $161,268, more than $145,000 higher than the dentist’s estimate. The Court ruled that the stock valuation method contained within the dental corporation’s restricted stock agreement must be used to value the corporate stock as it would be the value at which the remaining shareholders in the dentistry business would be forced to buy out the dentist’s stock and what the creditors would correspondingly receive. The court told the dentist he had to develop a Chapter 13 plan to pay off his creditors, the largest of whom was his ex-wife. Thus, though not as large of reduction as he had hoped, the dentist did reduce what he owed his ex-spouse from $212,000 to $161,268 – a bite to the ex-wife of over $50,000.

The Same Business Can have Different Business Values

“You can rarely use an existing business valuation report prepared as of a different valuation date and for a different purpose for a subsequent reason,” Denny Taylor said. The dentist’s valuator said the business was worth $15,800. The divorce court accepted a value of $212,000. The bankruptcy court adjusted that to $161,268. So, who was right and who was wrong? The courts admitted all three into testimony. However, all three were developed under differing circumstances and dates with the last two of those values determined to be correct by the two courts. These cases demonstrate the importance of the date of the valuation and the circumstances surrounding the purpose of the valuation in determining the true value of a business. Any change in the date and/or use of the valuation will change the opined value of the business.

Arriving at an accurate value for a specific situation requires the expertise of a qualified business valuator. At TD&T, our business valuation team can help you prepare valuations that match your specific situation.