Abstract The value of a closely held company may represent a significant component of a marital estate. Business valuation services play an increasingly crucial role in determining the value of a closely held family business and often facilitate a divorce settlement by providing an appraisal estimate in the absence of an actual sale as a basis to distributing marital assets. The results of the current study investigate family courts' decisions in cases where the marital estate includes a closely held company. In each case a valuation expert was retained by both spouses. The favorable decision was the verdict that selected either the husband's or wife's expert. The decisions were influenced by two factors: state law (community property versus equitable distribution) and the owner of the business (the husband alone or either the wife alone or as coowner). Cases in equitable distribution states had an odds ratio that was four times higher for a decision for the wife than cases in community property states, and cases in which the wife was either the sole owner or co-owner of the business had an odds ratio that was over four times higher to render a decision for the wife.

I. Introduction

The value of a closely held company may represent a significant component of a marital estate. Business valuation services play an increasingly crucial role in determining the value of a closely held family business and often facilitate a divorce settlement by providing an appraisal estimate in the absence of an actual sale as a basis to distributing marital assets. Valuation in the construct of divorce has some unique intrinsic characteristics that differ from a transaction between a willing buyer and willing seller. State law defines which marital property is subject to valuation and distribution, regardless if the property can be sold to a willing buyer. The valuation's purpose is to determine the value to the current owner in the marital community (Aalberts, Clauretie and Matoney 2000; Zipp 1992; Cenker and Monastra 1991; Evans 1994; Zipp 1992).

Business valuation in a matrimonial action presents itself with an array of issues that contribute to the complexity of an already difficult process. This study investigates whether specific characteristics of gender, state law and the nature of business ownership may influence the manner in which the value of a closely held company is ultimately awarded by the court.

Prior studies on the courts' valuation focused on specific valuation methods presented to the court and accepted in valuation cases (Martin 1972). Brody and Berger (1977) analyzed weighted average valuations presented to the court. Additional studies from Boseland (1963), Englebrecht and Davidson (1977) and Englebrecht (1979) examined the court ruling in the middle of the two experts' valuations. Boatsman and Baskin (1980) tested tax court valuation procedures that were accepted by the court. LeClair (1990) focused on prediction accuracy of earnings methods. Beatty Riffe and Thompson (1999) analyzed market comparables in valuing closely held companies in the tax court. DiGabriele (2007) investigated preferences for specific valuation methods in the matrimonial court and found that matrimonial courts were more likely to prefer the capitalization of earnings method when inflation was high, and involved a manufacturing company. In addition, the matrimonial court was more likely to prefer the excess earnings method when the case did not involve a service company.

Additional studies on divorce's effect on the family business have illustrated that closely held companies are a primary or sole source of marital funds (Rowe and Hong 2000). Galbraith (2003) concluded that divorce affects short-term financial performance of a family owned closely held company.

This research makes several incremental contributions to the literature on the court's valuation of closely held companies. Astrachan and Shanker (2003) estimate that closely held companies represent 89% of business tax returns filed with the Internal Revenue Service, employ 62% of the workforce and contribute 64% to the gross domestic product of the United States. …