Business Valuation Concepts and the Value of Expert Testimony in Family Law Matters

By: Jeralyn L. Lawrence, Esq.

Family lawyers often call upon experts’ analyses and opinions to assist them in achieving a financial resolution that benefits his or her client in settlement discussions, or when necessary, in advocating that client’s position at the time of trial. Experts are especially important in cases involving business interests and the valuation of same for purposes of equitable distribution and alimony awards. As case-law precedent explored herein illustrates, “[t]here is no single formula that will apply to each enterprise” in the valuation of a business. Bowen v. Bowen, 96 N.J. 36, 44, 473 A.2d 73 (1984). Indeed, “[t]he ultimate goal is to arrive at a fair market value for a stock for which there is no market.” Id. Attaining an expert to value business interests in family law matters is often integral because there exist “few assets whose valuation impose a difficult, intricate and sophisticated a task as interest in close corporations.” Torres v. Schripps, Inc., 342 N.J.Super. 419, 435, 776 A.2d 915 (App.Div. 2001).

An expert is a “person who, through education or experience, has developed skill or knowledge in a particular subject, so that he or she may form an opinion that will assist the fact-finder.” Garner, Black’s Law Dictionary (9th ed. 2009). Expert testimony is admissible “[i]f scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue. A witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.” N.J.R.E. 702. Under N.J.R.E. 702 expert testimony must deal with subject matter that extends beyond the knowledge and understanding of the average person; the field of testimony must be reliable; and the expert must possess sufficient expertise in the subject matter. Id. Notably, “[a] trial court is free to accept or reject the testimony of either side’s expert and need not adopt the opinion of either expert in its entirety.” Carey v. Lovett, 132 N.J. 44, 64, 622 A.2d 1279 (1993).

Interpreting N.J.R.E. 701, the Supreme Court in State v. Harvey, 151 N.J. 117, 169, 699 A.2d 596 (1997) opined: “(1) the intended testimony must concern a subject matter that is beyond the ken of the average juror; (2) the subject of the testimony must be at a state of the art such that an expert’s testimony could be sufficiently reliable; and (3) the witness must have sufficient expertise to explain the intended testimony.” In Harvey, the Defendant was convicted of the murder of a seven (7) year old and sentenced to death. Id. An officer noticed a bite mark on the Defendant’s hand. Id. A forensic odontologist performed a bite mark analysis and determined that the victim had bitten the Defendant, leaving the mark. Id. The Defendant objected, arguing that bite mark analyses are not state of the art such that an expert’s testimony could be sufficiently reliable. Id. The Supreme Court did not ultimately rule on whether or not bite mark analyses are reliable or admissible, perceiving no harm to the outcome at trial wherein the Defendant was convicted of murder, instead confirming that all other evidence adduced at trial established the Defendant’s guilt. Id.

Though expert testimony is often relied upon at trial, it is not always necessary. Specifically, the Appellate Division in Campbell v. Hastings, 348 N.J.Super. 264, 270, 791 A.2d 1081 (App.Div. 2002) held that expert testimony is not required when the trier of fact can understand the concept or issue at hand “utilizing common judgment and experience.” In this case, the Plaintiff, a seventy-five (75) year old woman, visited a friend who resided in the Defendant’s residence. Id. The Plaintiff fell in the “sunken foyer” of the Defendant’s home, under circumstances where it was dark outside, no light was turned on, and the Defendant failed to advise the Plaintiff of the existence of two (2) steps, causing her to fall forward. Id. Per the Defendant, the Plaintiff failed to provide expert testimony identifying why the foyer was dangerous. Id. The Appellate Division confirmed that in this case, no such testimony was required because “the subject can be understood by jurors using common judgment and experience.” Id.

Whereas N.J.R.E. 702 addresses the admissibility of expert testimony and defines same, N.J.R.E. 703 provides the acceptable bases of opinion testimony. N.J.R.E. 703 provides, in pertinent part, “[t]he facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the proceeding. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.” N.J.R.E. 703 addresses the foundation of expert testimony and requires an expert’s opinion to be based in fact and data that is derived from personal observations, evidence from trial, and / or data that is generally relied upon by experts in the field. N.J.R.E. 703, Comment 2.

Per the Supreme Court in Scully v. Fitzgerald, 179 N.J. 114, 129 (2004), N.J.R.E. 703 “requires that an expert opinion be supported by facts or data either in the record or of a type usually relied on by experts in the field.” Consequently, expert conclusions that lack support from facts or data are inadmissible. Pomerantz Paper Corp. v. New Cmty Corp., 207 N.J. 344, 372, 25 A.3d 221 (2011). This rule, commonly referred to as the “Net Opinion Rule,” requires an expert to provide an explanation that supports his / her opinion and not just a mere conclusion. Borough of Saddle River v. 66 E. Allendale, LLC, 216 N.J. 115, 123 n.3 (2013). (quoting Polzo v. Cnty. of Essex, 196 N.J. 569, 583, 960 A.2d 375 (2008): “A net opinion is “an expert’s bare opinion that has no support in factual evidence or similar data . . . An expert must provide the ‘why and wherefore’ that supports the opinion, rather than a mere conclusion.” The Net Opinion Rule is a “corollary” of N.J.R.E. 703. State v. Townsend, 186 N.J. 473, 494, 897 A.2d 316 (2006). An expert offers an inadmissible net opinion if they “cannot offer objective support for his or her opinions but testifies only to a view about a standard that is ‘personal.’” Pomerantz Paper Corp., supra, 207 N.J. at 372, 25 A.3d 221. Simply put, “[a]n expert’s bare conclusions, unsupported by factual evidence, [are] inadmissible.” Buckelew v. Grossbard, 87 N.J. 512, 524, 435 A.2d 1150 (1981).

Depending on the issues presented, expert testimony may be an essential component of litigation. Financial experts in particular are often called upon to provide expert testimony at time of trial in family law matters. Among other areas commonly addressed by financial experts are business valuations. To that end, there exist three (3) fundamental and traditional business valuation approaches: (1) the asset approach; (2) the market approach; and (3) the income approach. Lavene v. Lavene, 162 N.J.Super. 187, 197, 392 A.2d 621 (Ch.Div. 1978). In deciding which approach to follow, “[f]lexibility must be the byword . . . because ‘there is no inflexible test for determining fair value, as valuation is an art rather than a science that . . . requires consideration of proof of value by any techniques or methods which are generally acceptable in the financial community and otherwise admissible in court.” Id. See also Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 397, 734 A.2d 738 (1999).

The asset approach assumes that a prudent buyer would pay no more than it would cost to purchase the asset(s) (tangible and intangible) of a company at current market prices. This approach requires estimating the individual values of the subject company’s assets and liabilities to derive an adjusted equity value. Common methods within the asset approach are the net asset value method, and the liquidation value method.

The market approach estimates value through analysis of stock from publicly traded guideline companies (i.e. the “publicly traded guideline company method”), or recent sales of guideline companies (the “guideline transaction method”). Under the Publicly Traded Guideline Company Method, the prices of stocks traded in a free and active market are regarded as being priced at fair market value. Value multiples are then developed and applied to various measures of the subject company, such as earnings, cash flows and revenues, to determine the value of the subject company. Per the Guidelines Transaction Method, the value of a company is estimated through comparison of the subject company to recent transactions involving companies in the same industry. This method can be employed in conjunction with or in lieu of the publicly traded guideline company method, but is the primary market method for valuing smaller, privately held companies.

The third valuation approach, the income approach, is based on the theory that the value of a business is equal to the present value of the entity’s future stream of expected income, earnings, or cash flow. There are two (2) primary methods within the income approach: (1) the capitalization of earnings method; and (2) the discounted cash flow (“DCF”) method. The capitalization of earnings method is utilized when income is projected to be at a consistent rate over time and historical results of operations provide a reasonable measure of expected future results. The discounted cash flow (DCF) method is utilized when income is projected to change at variable annual amounts for a certain period of time and projections are available from management.

In addition to the aforementioned valuation approaches, financial experts utilize a litany of terms, phrases, and approaches when formulating their opinions within expert reports and testimony before the trier of fact. These “buzz words” often include but are not limited to fair market value; normalization adjustments / discretionary items; reasonable compensation; and capitalization rate. Fair market value is defined as “the price at which the subject ownership interest would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both parties having reasonable knowledge of all relevant facts.” United States v. Cartwright, 411 U.S. 546, 93 S. Ct. 1713, 36 L.Ed.2d 528 (1973). Fair market value was further explored and interpreted in the matter of Brown v. Brown, 348 N.J.Super. 466 (App.Div. 2002). In Brown, Husband worked for his family’s florist business during the marriage. His parents gradually transferred large minority interests to him and his brother. Id. At the time of the parties’ divorce, the trial court assessed the law, weighed the routine factors, and awarded alimony and child support based on the evidence before it. Id.

The Appellate Division found that the trial court erred in valuing the husband’s business interest in the family close corporation. Id. According to the Appellate Division, husband met his burden of illustrating that the shares were gifts from his parents, and the original value should have been deducted from their valuation for purposes of equitable distribution:

[T]here are probably few assets whose valuation imposes a difficult, intricate and sophisticated a task as interests in close corporations. They cannot be realistically evaluated by a simplistic approach which is based solely on book value, which fails to deal with the realities of the good will concept, which does not consider investment value of a business in terms of actual profit, and which does not deal with the question of discounting the value of a minority interest. Id.

The Appellate Division relied upon Brown, interpreting the meaning of fair value (as it relates to valuing a closely held business incident to divorce) as fair market value without consideration for minority discounts or marketability discounts. Id. Noting the foregoing interpretations of fair market value, the Appellate Division ultimately held that the trial court correctly refused to discount the shares’ value for minority interest status or lack of marketability and refused to treat the husband’s share in a real estate partnership as a family gift, where the corporation paid for real estate taxes. Id. As all of the awards impacted one another, the Appellate Division reversed in part, with instructions to the trial court to reconsider all awards on remand. Id.

Normalization adjustments / discretionary items are also considered by experts when valuing a business interest. They are expenses paid by the business that benefit the owner personally. Examples of normalization adjustments / discretionary items include but are not limited to life insurance, personal travel, personal meals, personal automobile insurance, expenses for personal residence, and the like. These items must be added back to the income of a business to calculate the true operating income of same.

Salaries of business owners, and more specifically, reasonable compensation, represent yet another aspect of an expert’s analysis when valuing a business interest. Salaries of owners of closely held businesses can be decided without consideration of what is actually reasonable. Specifically, an owner of a closely held business can determine his / her salary based on need or a desire to lower taxable income rather than based on efforts, duties, background, experience, time devoted to the business, qualifications, and the like. This is considered the business owner’s “reasonable compensation.”

Experts also commonly address capitalization rate in their analysis, which starts with a discount rate, representing an investor’s required rate of return. A common method in determining the discount rate is the build-up method. The build-up method starts with a risk-free rate and adds risk components that are appropriate and specific to the company. To arrive at a capitalization rate, the long-term annual growth rate is subtracted from the discount rate. A capitalization rate is a divisor to convert income into value. By way of example, normalized income of $100,000 is divided by the divisor (i.e. 20%), resulting in a $500,000 value. The following are a series of examples of capitalization rate and how same impacts the valuation of a business interest. Note that earnings multiples are the reciprocal of capitalization rates. By way of example, a capitalization rate of 20%, as illustrated in the following examples, is equivalent to a five (5) times multiple.

Excess Compensation Example

Reported Income	$200,000	$200,000
Excess Compensation	$300,000	$0
Adjusted Income	$500,000	$200,000
Capitalization Rate	20%	20%
Value	$2,500,000	$1,000,000

Perquisites Paid through Business Example

Reported Income	$200,000	$200,000
Perquisites	$400,000	$200,000
Adjusted Income	$600,000	$400,000
Capitalization Rate	20%	20%
Value	$3,000,000	$2,000,000

Example of Same Adjusted Income (but different Capitalization Rates)

Adjusted Income	$500,000	$500,000
Capitalization Rate	20%	15%
Value	$2,500,000	$3,333,333

Though experts are instrumental in assisting attorneys with valuing business interests, they do not opine as to the actual distribution of value between litigants incident to divorce. Instead, it is the attorney for the client that must advocate his / her position on distribution of value, using the expert’s testimony in support of same. The determination is ultimately left to the trier of fact should the parties be unable to resolve the issue amicably prior to trial. For attorneys representing the spouse retaining the business interest, he / she may advocate that the client should retain a greater percentage because they (1) are assuming the risks of retaining the business; (2) may also be working for the business; and (3) may be liable for tax consequences associated with selling the business in the future. For those attorneys representing the non-retaining spouse, he / she may advocate that the client is entitled to retain a higher percentage of the business value because the client was contributing to the business’ success during the marriage in some form.

In the unpublished case of Fox v. Fox, the Appellate Division was tasked with reviewing the trial court’s determination of equitable distribution of the Plaintiff’s premarital bowling equipment company, EBN. Fox v. Fox, No. A-0700-17T3, 2019 N.J. Super. Unpub. LEXIS 823, at *1 (App. Div. Apr. 9, 2019). The trial court determined that the parties were to share in the value of EBN equally. Id. On appeal, the Plaintiff argued that the Defendant was not entitled to an equal distribution, or any distribution of value because (1) the Defendant did not contribute toward EBN’s growth during or after the the marriage; (2) in the event EBN was subject to equitable distribution, the value should have been determined as of 2012 (the date of the parties’ separation) instead of 2015 (the date of Complaint); and (3) the trial court abused its discretion in distributing the value of EBN equally. Id.

The parties in Fox began residing together in 1996, with two (2) children born of their relationship between 1996 and 1999. Id. One (1) of the children born of the parties’ relationship was diagnosed with autism. Id. The parties separated in 1999, and the Plaintiff started his business, EBN, in 2001. Id. The business, which predominantly bought and resold bowling equipment, was unprofitable between 2001 and 2004. Id. In 2004, EBN had a net loss of $13,000 on gross receipts of $208,000. Id. The parties moved back in together in 2003 and were married in 2004. Id. Though there were disputes in the testimony presented, it was determined that the parties shared in the household work and in caring for the children. Id. The Plaintiff quit his employment around the time the parties were married and began working full-time with EBN. Id. By 2008, EBN had over $770,000 in gross sales, and a net loss of $20,000. Id.

According to the Plaintiff, the Defendant was never employed by EBN. Id. Instead, she worked as a hairdresser and later returned to school to become a medical assistant. Id. The Plaintiff argued that the Defendant’s income was greater than that he realized from EBN until 2012, when he more formally started to take a shareholder distribution from the business. Id. An accountant hired to value EBN found an average normalized officer compensation of approximately $45,000 (between 2008 and 2011), and average actual distributions of approximately $23,000, from which the Appellate Division inferred that the Plaintiff maintained the majority of marital expenses. Id. The parties ultimately separated in 2012. Id. EBN flourished following the parties’ separation. Id. According to the Plaintiff, he was able to commit more time and energy to EBN post-separation because the Defendant was spending more time with the children. Id. In addition, EBN also acquired new product lines, acting as a distributor for a number of suppliers, and also acquired Ashford Manufacturing, thus allowing EBN to sell parts and components internally. Id. Per the Plaintiff, the “earlier economic slowdown” also drove many competitors out of business, thus increasing the value of EBN. Id.

The parties jointly hired an accountant to value EBN incident to divorce. Id. The joint accountant assessed EBN’s fair market value at $183,000 in 2015, and valued EBN between $43,000 to $53,000 in 2012. Id. The accountant did not value EBN as of 2004 (the year in which the parties were married). Id. The trial court equitably distributed half of the $183,000 value to the Defendant, and the Plaintiff filed an appeal. Id. The Appellate Division determined that the increase in value of EBN was subject to equitable distribution as the “asset increased in value during the marriage. While the increase was directly tied to [the Plaintiff’s] efforts, [the Defendant] indirectly contributed to the increase by enabling [the Plaintiff] to devote time and resources to EBN.” Id. Thus, the Appellate Division accepted the trial court’s determination that “it was his marriage to [the Defendant], and her financial and non-financial contributions to the household and child rearing, that allowed plaintiff to devote his full-time efforts to building EBN.” Id.

The Appellate Division also affirmed the trial court’s use of the 2015 valuation date, rejecting the Plaintiff’s assertion that the court erred in failing to assess the value as of the parties’ separation in 2012. Id. Per the Appellate Division, although the parties physically separated, “they only reached an oral agreement regarding financial support. Here, the parties never agreed about the disposition of EBN, never submitted a written agreement dividing assets, and never actually divided assets.” Id. For these reasons, the trial court “correctly valued EBN using the date the divorce complaint was filed in 2015.” Id.

Finally, and in response to the Plaintiff’s argument that the trial court abused its discretion by dividing EBN equally because (1) the Defendant did not contribute significantly toward EBN or the household; (2) he bore the risk of pursing EBN; and (3) he should receive “just reward” as the primary risk bearer, the Appellate Division noted that “while EBN grew for a number of reasons, [the Plaintiff] himself admitted that the separation gave him more time to work on EBN because [the Defendant] assumed a greater share of the household and child rearing duties. We shall not disturb the trial court’s finding that [the Defendant] made an equal, non-financial contribution to the appreciation in value of EBN even after the parties separated.” Id. However, the Appellate Division remanded the matter to allow the Plaintiff an opportunity to prove that EBN had a positive, premarital value. Id.

In Lavene v. Lavene, 148 N.J. Super. 267, 271 (App. Div. 1977), the trial court entered a final judgment at the conclusion of an eleven (11) day trial finding that the Plaintiff’s business interest had no value and was thus not subject to equitable distribution. According to the Defendant’s accountant, the Defendant’s electronic business had a book value of $142,932.05. Id. The sum of $98,000 was attributable to “good will.” Id. As president of the business, the Defendant personally guaranteed $22,000 in corporate notes. Id. Following trial, the court deducted the $98,000 “good will” and assumed that the Defendant’s interest in the business was 43% of the remaining balance, or approximately the equivalent of the loans guaranteed. Id. The trial court thus concluded that the business interest had no value. Id. The Appellate Division reversed and remanded the trial court’s determination because it could not “discern why the judge entirely discounted the corporate good will or why, since the corporate balance sheet included as obligations the loans [the Defendant] had personally guaranteed, it in effect deducted them twice.” Id.

The Appellate Division further noted that there was no record that the Defendant would be called upon to meet the personal guarantees made to the business in the sum of $22,000. Id. Finally, the Appellate Division acknowledged that the Defendant’s income ($25,000 annually) did not include “what appear to be quite generous fringe benefits, including expenses of transportation, entertainment, travel and insurance.” Id. Thus, the Appellate Division concluded that the “business interest is not without value. What its value is, what plaintiff’s allocated share thereof should be, and the manner in which she should receive that share will have to be determined on remand.” Id.

The Appellate Division in Addesa v. Addesa, 392 N.J. Super. 58, 64 (App. Div. 2007) also addressed the equitable distribution of a business interest incident to divorce under circumstances where the trial court vacated the parties’ Property Settlement Agreement, and the terms of equal distribution between them. The parties in Addesa were unrepresented at the time they entered into a mediation agreement with a private mediator on January 22, 1999. Id. The mediation agreement was reduced to a Property Settlement Agreement on June 16, 1999, and the Plaintiff filed a Complaint for Divorce on August 23, 1999. Id. The Judgment of Divorce, incorporating the Property Settlement Agreement, was entered on May 24, 2000. Id. The Defendant filed a motion to set aside the Property Settlement Agreement in November 2000, seeking a plenary hearing, and asserting that the Plaintiff had knowledge of and in fact received financial information during mediation that would render the Agreement unconscionable. Id. Specifically, the Defendant maintained that the Plaintiff led her to believe that MSI and JSP, two (2) business interests, were worth only $642,920 and $298,896, respectively, when in reality, the Plaintiff knew they were far more valuable. Id. Same was further illustrated by the sale of MSI for $16,000,000 in October 2000, and the assessed value of a building owned by JSP in the sum of $512,000. Id.

According to the Defendant, she was inexperienced in financial matters, there was no exchange of financial information, and she relied on the Plaintiff’s representations, including his assertion that the parties were unable to afford attorneys to represent them in their divorce. Id. The Defendant further relied upon the terms of the Property Settlement Agreement, noting that the agreement was based on “full and fair disclosure” of marital assets and their values. Id. Finally, the Defendant asserted that the Plaintiff admitted to her that he “forgot” to apprise the mediator of his interest in MSI’s ESOP, which was “potentially worth millions of dollars.” Id. The Plaintiff denied the Defendant’s assertions in their totality, instead maintaining that he had no reason to believe, at the time of mediation, that MSI would sell for such a substantial sum. Id. The Plaintiff also suggested that it was the mediator’s suggestion to use the book value as the basis of value for MRI and JSP, stating that the Defendant knowingly accepted a reduced distribution because she desired to pursue a relationship with another man. Id. The Plaintiff offered no explanation as to why his interest in ESOP was not distributed. Id.

Following a plenary hearing, the trial judge opined that it was “easy to arrive at the finding” that the Property Settlement Agreement was unconscionable and had to be set aside, “since the distributions made to defendant for her interest in MSI and JSP in no way effectuated the parties’ intent, expressed throughout the PSA, to divide their assets ‘on an exactly 50-50 basis.’” Id. The judge vacated and “recast” equitable distribution of the business interests “since . . . the correct value of those assets at the time of the [PSA] was so markedly different from the book value set forth [therein], the [PSA] was unconscionable and did not reflect what the parties, including plaintiff, intended.” Id. In response to the Plaintiff’s argument that the business interests should not have been equally divided between the parties, the Appellate Division confirmed that same was appropriate and warranted in light of the “length of the parties’ marriage, the fact that defendant was there at the inception of the business, and the fact that defendant made a home for plaintiff and took care of the parties’ two daughters, thereby enabling plaintiff to achieve success with his business.” Id. The Appellate Division affirmed the trial Court’s determination. Id.

In Steneken v. Steneken, 183 N.J. 290 (2005), the parties were married for twenty-four (24) years. Id. The most valuable marital asset was a close corporation of which husband was the sole shareholder. Id. The trial court accepted the value asserted by husband’s expert, who used the income or capitalized earnings approach. Id. Per the expert, husband paid himself more than the market value of his own services. Id. The expert valued the corporation as if the salary paid to husband was lower, thus increasing the overall value of the corporation. Id. The trial court, on remand, adjusted the first alimony award (the lower salary) to an alimony award that contemplated husband’s actual salary. Id.

Husband argued that a credit on one side requires a debit on the other or the result would be an interplay between alimony and equitable distribution resulting in a double counting. Id. The trial court disagreed with husband’s argument, and the Appellate Division affirmed:

Because we embrace the premise that alimony and equitable distribution calculations, albeit interrelated, are separate, distinct, and not entirely compatible financial exercises, and because asset valuation methodologies applied in the equitable distribution setting are not congruent with the factors relevant to alimony considerations, we conclude that the circumstances here present a fair and proper method of both awarding alimony and determining equitable distribution.

The Appellate Division further opined that, “[w]here, as here, the major marital asset is a closely held corporation and the supporting spouse has determined what his or her income was during the marriage, the supported spouse is entitled, post-divorce, both to alimony sufficient to maintain a reasonably comparable lifestyle and to a fair division of the asset.” Id.

As is clear from the aforementioned case-law precedent, in matters involving equitable distribution of business interests, it is expert analyses, the unique facts and circumstances of each individual case, and attorney advocacy that impacts judicial determinations. In Goldman v. Goldman, 248 N.J.Super. 10 (Super.Ct. 1991), husband and wife were restrained from alienating or encumbering marital assets pursuant to court Order. Husband thereafter lent $350,000 to his business, a car dealership and marital asset, which subsequently became worthless between the date of filing of the Complaint for Divorce and the date of the divorce trial. Id. Wife conceded that husband acted in good faith but argued that the business should have been valued as of the date of Complaint, with husband charged for his investment of $350,000 into the business. Id. The trial court held that Husband used marital funds for the business in good faith because he was authorized by Order to continue to conduct his business in the ordinary course. Id. The trial court further found that husband’s use of funds was to preserve the business. Id. For these reasons, the trial court held that it would be unfair to charge husband with an asset valued at the time of filing of the Complaint when the asset had no value at the time of trial. Id.

On appeal, the Appellate Division addressed the issue of when an asset should be valued for purposes of equitable distribution. Id. The Appellate Division was also called upon to address whether a litigant should be charged for investing post-Complaint marital funds into a marital business, which is then determined to have no value at the time of trial. Id. Though, pursuant to case-law precedent, “[t]he date for valuing assets should be the same as the termination date for determining eligible assets[,]” Smith v. Smith, 72 N.J. 350, 362, 371 A.2d 1 (1977); Borodinsky v. Borodinsky, 162 N.J.Super. 437, 447, 393 A.2d 583 (App.Div. 1978), the Appellate Division ultimately affirmed the trial court’s determination, noting that per the facts presented, “it would be unfair to charge [husband] with an asset having a value of $294,000 at the time of the complaint when that asset has no value at the time of trial. Accordingly, the car dealership will be valued as of the trial date.” Id. See also Carlsen v. Carlsen, 72 N.J. 363, 371 A.2d 8 (1977): “The only assets that can be found for equitable distribution in any case are those acquired by the spouses during the span of the marriage. Should it be determined that all such assets have been expended, there would then be nothing to distribute.” Id.

The Appellate Division’s holding in Goldman followed that of the court in Scherzer v. Scherzer, 136 N.J.Super. 397, 346 A.2d 434 (App.Div. 1975). Specifically, Scherzer stands for the proposition that assets that became worthless after the Complaint for Divorce was filed were not subject to equitable distribution. Id. In so deciding, the Scherzer court opined as follows:

The Legislature mandates that the distribution be an equitable one. In determining what is equitable the trial judge must consider all the particular circumstances of the individuals before it. A proper factor in that determination is any significant change in the valuation of marketable assets that occurs prior to final judgment. We observe no exceptional circumstances in this case which might justify the making of an award in plaintiff’s favor as to assets which have become valueless. Nor do we detect anything in the record which suggests that the depletion in value was the result of deliberate action on the part of defendant. Id.

The Supreme Court in Smith v. Smith, 72 N.J. 350, 362, 371 A.2d 1 (1977) addressed comparable situations where assets subject to equitable distribution change in value between the date of filing of the Complaint for Divorce and the date of trial. According to the Court,

If the changes are minor, they can either be ignored or any unduly adverse effects that a judgment of equitable distribution might have on the present circumstances of either party may be compensated for by adjusting the alimony provisions: that is, a husband whose assets have diminished since the date of the agreement may still be required to turn over to his wife her equitable share of the property he then held, but since his present circumstances may then be somewhat straitened compared to hers, this favor may be taken into consideration in relation to the award of alimony. Conversely, a husband whose assets have increased since the date of the separation agreement will not be required to divide the increase with his wife, but his present favorable situation will be a factor that may be considered in setting alimony . . .

We can conceive of situations in which the change in one party’s financial position may be so great that measures such as these would not be sufficient to do mutual justice; in such a case, a party must be permitted to apply to the court for appropriate equitable consideration of the special circumstances involved. The distribution, though made belatedly, must still be equitable.

Simply put, “[t]ere is no absolutely ironclad rule for determining date of evaluation of assets, but use of a consistent date is preferable, such as the filing of the complaint, or perhaps the time of the hearing, depending on the nature of the asset and any compelling equitable considerations.” Bednar v. Bednar, 193 N.J.Super. 330, 332, 474 A.2d 17 (App.Div. 1984). By way of example, the trial court in Scavone v. Scavone, 230 N.J.Super. 482, 553 A.2d 885 (Ch.Div.1988), affirmed by the Appellate Division, determined that a seat on the NY Stock Exchange was a passive asset, to be valued as of date of distribution, “[s]ince the increment in value was caused solely by market forces and not by defendant’s efforts or diligence, it was not an abuse of discretion to apply the trial-date value.” In so doing, the trial court differentiated between active and passive assets, noting that “[b]y its very nature, an active asset’s increase or decrease in value is a direct result of the attention, time, energy and devotion of the sole owner. Therefore, this court acknowledges its predecessors in stating that, if one spouse labors or makes waste of an asset, it is that spouse who ought to reap any benefit of suffer any loss which occurs as a direct consequence of effort and time exerted.” Id.

Yet another factor to be considered when assessing value to a business interest is “goodwill,” which is a legally protectible interest. J.B. Liebman & Co. v. Leibman, 135 N.J.Eq. 288, 292 (Ch. 1944). “The goodwill, which has been the subject of sale, is nothing more than the probability, that the old customers will resort to the old place.” Cruttwell v. Lye, 17 Ves, 335, 346, 34 Eng. Rep. 129, 134 (Ch. 1810). In Dugan v. Dugan, 92 N.J. 423 (1983), husband owned a law practice, which was a marital asset. He sought a determination as to whether “goodwill” was deemed property subject to equitable distribution incident to divorce. Id. Husband’s expert valued goodwill but averaged only four (4) years of his income, included promotion / travel / auto expenses each year, and used as a comparison information compiled from the IRS generally throughout the United States, and not specifically the State of New Jersey. Id. The trial court held that goodwill is intangible, but nonetheless real, and part of any law practice. Id. It calculated the value of “goodwill,” predicated on the theory that husband was comparable to the typical incorporated attorney whose gross assets were roughly equal to husband’s. Id.

This comparison was limited to the efficiency of the respective operations (the percentage that net income before income taxes bears to gross receipts). Id. Per the Appellate Division. goodwill should be considered in equitable distribution of marital property because it could be translated into prospective earnings, based on a probability of existing circumstances. Id. In order to calculate the value of goodwill of a law practice, the court must ascertain what an attorney of comparable experience, expertise, education, and age would be earning as an employee in the same general location. Id. Specifically,

The court should first ascertain what an attorney of comparable experience, expertise, education and age would be earning as an employee in the same general locale. . . The attorney’s net income . . . for a period of years, preferably five, should be determined and averaged. The actual average should then be compared with the employee norm. If the attorney’s actual average realistically exceeds the total of (1) the employee norm and (2) a return on the investment in the physical assets, the excess would be the basis for evaluation goodwill. This excess is subject to a capitalization factor. The capitalization factor is generally perceived as the number of years of excess earnings a purchaser would be willing to pay for in advance in order to acquire goodwill. Id.

The Appellate Division ultimately remanded the matter back to the trial court for determination of the value of the goodwill of husband’s law practice, necessitating with the foregoing instructions. Id.

Though other elements may contribute to goodwill in the context of a professional service, such as locality and specialization, reputation is at the core. Paulsen, “Goodwill and Going Concern Value Reconsidered,” Mergers & Acquisitions, Winter 1980 at 10. It does not

exist at the time professional qualifications and a license to practice are obtained. A good reputation is earned after accomplishment and performance. . . Future earning capacity per se is not goodwill. However, when that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value. When that occurs, the resulting goodwill is property subject to equitable distribution . . .

Much of the economic value of produced during an attorney’s marriage will inhere in the goodwill of the law practice. It would be inequitable to ignore the contribution of the non-attorney spouse to the development of that economic resource. An individual practitioner’s inability to sell a law practice does not eliminate existence of goodwill and its value as an asset to be considered in equitable distribution.

Methods for determining the value of goodwill of a law practice, like that which confronted the Appellate Division in Dugan, may involve fixing the amount by which an attorney’s earnings exceed that which would have been earned as an employee by a person with similar qualifications of education, experience, and capability. Levy v. Levy, 164 N.J. Super. 542, 547 (Super. Ct. 1978). In Slutsky v. Slutsky, 451 N.J.Super, 332 (App.Div. 2017), the parties were married for thirty years. Husband was a partner in his firm and paid a $300,000 capital contribution financed through a four (4) year note. Husband was a party to a shareholder’s agreement with the firm. Id. The agreement described the firm’s obligation to purchase the shareholder’s stock when he / she ceases employment with the firm, and defined a formula fixing the amount of payment for the interest. Id.

Most of husband’s clients came from other partners, and he was not the originator of the clientele. Id. Goodwill was added as a component of his firm interest. Id. Wife’s expert determined the reasonable compensation of an attorney with husband’s education and experience. Id. These earnings were based on historic data projected to husband’s retirement date (age seventy (70)), were adjusted for taxes (40% tax rate), and reduced to present value. Id. Wife’s expert opined the goodwill value of husband’s interest in the firm was $1,185,304. Id. Husband’s expert’s methodology was similar, but he argued that there was no separate goodwill interest in his ownership, that wife’s expert double counted items, added perquisites not received by husband, and used a depressed reasonable compensation amount. Id. The trial court rejected husband’s expert, finding it “incredible” that the firm had no goodwill value. Id. The Appellate Division reversed and remanded the trial court decision. Id.

In so deciding, the Appellate Division opined that, “[a]s Dugan instructs, the start of the examination of goodwill considers whether excess earnings exist.” Id. The Appellate Division found that the trial court failed to analyze the differences in the expert’s positions, even under circumstances where the opinion accepted by the trial court had conceded flaws by the expert asserting said position:

We believe the trial judge misunderstood [husband’s] conclusion, as suggesting goodwill did not exist for the firm. Actually, [husband’s expert’s] opinion asserted the TCA of each equity partner accounted for any goodwill. Further, plaintiff, who was not an originator but a worked in a highly specialized legal area, was actually paid what a similarly skilled lawyer would be paid.

The Appellate Division further opined that, “[h]ere, a nuanced valuation methodology is required because Husband is an equity partner in a large firm, who generally is not responsible for originations, and who is bound by the firm policies and a shareholder agreement.” Id. An analysis of goodwill “must evaluate the firm’s shareholder’s agreement to determine whether it is an appropriate measure of the total firm value, including goodwill. That formula computes an existing partner’s interest, calculated as a portion of the firm’s excess earnings.” Id. The trial court was also instructed to consider husband’s projected term of future employment. Per the Appellate Division, once the value of husband’s interest in his firm is determined, analysis must then be made to discern wife’s interest in the asset. Id.

The Appellate Division in Piscopo v. Piscopo, 232 N.J. Super. 559, 560 (App. Div. 1989) also addressed the issue of valuing goodwill, distinguishing between professional goodwill and celebrity goodwill. In this case, the Plaintiff was an entertainer and comedian. During the divorce trial, he argued that goodwill attributable to his status as a celebrity was not a marital asset subject to equitable distribution. Id. The trial court appointed an expert to value the Plaintiff’s business, Piscopo Productions, Inc., and to calculate the value, if any, of his celebrity goodwill. Id. At trial, the expert testified that the value of Piscopo Productions, Inc. was “analogous to valuing any other professional corporation.” Id.

The expert ultimately attributed a value of $158,863 to the Plaintiff’s celebrity goodwill. Id. In arriving at this value, he took 25% of the Plaintiff’s average gross earnings over a three (3) year period, and applied no further discount, noting he had already discounted the applicable percentage based on the Plaintiff’s experience and training. Id. The trial court ultimately determined that the goodwill value of the Plaintiff’s business was a distributable marital asset. Id. Upon review of the record, the Appellate Division affirmed. Id.

Each of the aforementioned cases confirms the importance of expert testimony in family law cases, especially those that involve valuing business interests subject to equitable distribution. Valuing business interests can be a complex exercise, and there are various methodologies utilized to do so. Each case presents a unique fact pattern and accompanying analysis. While it is the expert’s obligation to analyze and distill this information to present to a trier of fact, it is ultimately the attorney’s responsibility to advocate for equitable distribution of the asset itself.