Business valuations are often important considerations in Pennsylvania family law cases. Depending upon the type of business and/or its legal status (“S” corporation, Limited Liability Corporation (LLC), Limited Liability Partnership (LLP)) any number of business valuation methods may be utilized to arrive at the value of the business for equitable distribution purposes. Recently, the Pennsylvania Superior Court issued a ruling which addressed the valuation of an “S” corporation for equitable distribution purposes. The case of Balicki v. Balicki (2010 PA Supra. 134) found that the Master erred in her analysis of the husband’s business interest in an insurance agency.
In this case, it was understood that the business would not be sold, therefore, in making her business valuation, the Master excluded expenses of sale, transfer, or liquidation which could include broker commissions, finders fees, attorney fees and accountant fees. These expenses are considered to be terms and conditions of sale and the consummation of a sale. Additionally, the Superior Court ruled that the Master failed to take into consideration any taxes that may be associated with the sale or liquidation of a business.
That the business was not intended, or likely, to be sold does not matter in this valuation. Instead, the Balicki court considered Pennsylvania statutes 23 PACSA § 3502(a)(10.1) and (10.2) which state that for the purposes of equitable distribution of marital property, the Court must consider the Federal, state and local tax ramifications even if they are not “immediate and certain”, and similarly, the sale, transfer, or liquidation of an asset need also not be “immediate and certain,” either.
In effect, the Balicki court reduced the value of the existing business by expenses which it acknowledged would not likely be applied in that situation. The effect of this from a practical sense is that it reduces the marital estate, and therefore, the other spouses overall equitable distribution award. The Balicki court ultimately found that § 3502 articulates the Pennsylvania legislature’s intention to eliminate the practice of lower courts analyzing the prospective sale of an asset. Instead, they believed that the legislature intends the assets to “simply be given the value they would have a distribution after every expense necessary to achieve liquidation. Balicki 15.
The Balicki court also indicates that the reliance upon the 1988 Pennsylvania Supreme Court case Hovis v. Hovis has been misplaced. That case addressed the valuation in which the action preceded a change in the statute. Once the statute was changed by the legislature, the Hovis case was effectively overturned and the subsequent ruling in Hovis nullified. The Balicki decision now sets the precedence for the valuation of businesses for equitable distribution purposes.