If you are a business owner preparing to go through a divorce, one of your biggest concerns may be what happens to your business. One of the first things a court will do is work to place a value on your business. Many different factors go into determing business valuation. These formulas for business valuation are constantly evolving. Valuing a business is a difficult task…especially for an Illinois courts. As you know, there are many reasons for a business’s success so it’s hard to determine what actually accounts for a business’s value.
This article tracks ALL the Illinois courts’ opinions on how to value a business from 1977 to present day. This article includes what factors Illinois courts will consider, the proposed methods of valuation, and what pieces of a business may (or may not) be divisible in your divorce.
As with every article, the cases will be updated in the coming months and years as Illinois courts release new opinions.
Dep’t of Pub. Works & Bldgs. V. Ass’n of Franciscan Fathers, 69 Ill. 2d 308, 315 (1977)
If your business is on property that is due for a potential rezoning, that may affect the value of the business. The business’s value could go up or down depending on how the zoning will affect the property and surrounding area.
“It is proper to base value upon the highest and best use permitted, not only under existing but also under other zoning classifications where there is reasonable probability of the granting of such zoning in the near future.”
Olsher v. Olsher, 78 Ill. App. 3d 627, 635 (Ill. App. Ct. 1979)
If you own part of a closely held company, your stocks are not listed on any stock exchange. They’re not easily bought and sold, and therefore difficult to value. Further, an older value for stock cannot dictate the current value of the stock. Courts have also traditionally recognized some value derived from the ability to make decisions and share in profits. So, courts will treat stocks in a closely held company as assets with a value they can calculate.
“The value of stock fluctuates freely with the operation of the business. Therefore, a past value would not give the trial court an accurate idea of the stock’s worth.”
“In a close corporation the corporation’s shares are not listed on a stock exchange or actively dealt in by brokers and, therefore, there is no established market for the corporation’s stock. The shareholders of a close corporation, however, like those of any corporation, do realize a value from stock ownership in that they have certain rights of control or future profits. Furthermore, courts have recognized an ascertainable value for shares of stock in closely held corporations.”
Chrysler Corp. v. ILL. PROPERTY TAX APPEAL BD., 387 NE 2d 351 – Ill: Appellate Court, 2nd Dist. 1979
One of the factors for valuating a business is its fair market value. Fair market value is what the property would presently bring at sale.
“[Fair market value is] what the property would bring at a voluntary sale where the owner is ready, willing and able to sell but not compelled to do so and the buyer is likewise ready, willing and able to buy, but not forced to do so. This is theoretically an objective standard of valuation; the value of particular property is set by the forces of the marketplace at a given place and time.”
In Re Marriage of Kennedy, 418 NE 2d 947 – Ill: Appellate Court, 1st Dist. 1981
If you owned a business before you got married, that business is considered non-marital property. Even if your business increased in value, or your spouse helped, the business is likely not divisible as marital property.
“The stores that [he] owned before the marriage are his non-marital property. They are no doubt worth more now than they were then. However, the increase in value of non-marital property is non-marital property.”
“Under the circumstances of a particular case, it is possible for one spouse to improve the other spouse’s non-marital property without making that property marital.”
In re Marriage of Wilson, 110 Ill. App. 3d 809, 443 N.E.2d 31 (1982)
When a business has enterprise goodwill, the goodwill is attached to the business itself rather than the entrepreneur. In other words, if the professional leaves the business, it would still be successful. If a business has this enterprise goodwill, it adds to the value and should be considered. This case offers positive subsequent approval of Olsher.
“The existence and value of good will as an asset of the partnership should also be considered.”
In re Marriage of Wilder, 122 Ill. App. 3d 338, 461 N.E.2d 447 (1983)
Personal goodwill, as opposed to enterprise goodwill, may not be considered when valuing the business. Personal goodwill is attached to the entrepreneur himself and should be considered when determining future earning potential for a maintenance award. Using personal goodwill for both purposes is double dipping and not permitted in valuation. This case was subsequently relied upon in Zells.
“Since the trial court considered respondent’s earning potential, i.e., “good will” as defined in White, we cannot say that it abused its discretion in failing to set a fixed monetary value for good will in valuing the stock.”
In re Marriage of Kaplan, 141 Ill. App. 3d 142, 490 N.E.2d 69 (1986)
Courts must consider a business’s debts when they place a value. However, they are not bound to use one method for bad debt, such as the Black Motor formula. If such a formula would produce an arbitrary result for the business’s value, a court can use a different method to produce a fair outcome.
The Black Motor formula, allowed by the IRS, “allows businesses to deduct as uncollectable a percentage of their receivables equal to the percentage of receivables actually written off as uncollectable for the prior five years.”
“Of course, there will be cases in which the formula will generate an arbitrary result. In such a case, where the taxpayer can point to conditions that will cause future debt collections to be less likely than in the past, the taxpayer is entitled to an addition larger than Black Motor would call for.”
“The trial court appropriately found that it was not bound to the rigid application of the Black Motor formula.”
In re Marriage of Rubinstein, 145 Ill. App. 3d 31, 495 N.E.2d 659 (1986)
Personal goodwill should be used to determine future earning potential of the entrepreneur. It may not be used to value a business itself or fix prices for stocks. This case was relied upon in Wilder and Zells.
“If [the court] were to consider goodwill as a factor in valuing a professional corporation, it would be giving double consideration to the professional spouse’s ability to generate income.”
In re Marriage of Leff, 148 Ill. App. 3d 792, 499 N.E.2d 1042 (1986)
If you want an expert to testify on your behalf about the value of your business, you must present that evidence at trial. If you don’t present any evidence about the business’s value, you can’t introduce that later on appeal. In this case, the complainant actually looked for evidence of the business’s value, but didn’t present any at trial. The court said this created a presumption that the evidence would not work in her favor, so she purposefully did not bring it to the table. However, that also means that she can’t bring any new evidence on appeal.
“[She] failed to offer any evidence as to the value of the business, save for the loan application, even though she clearly had attempted to gather such evidence. Her failure to offer such evidence under these circumstances creates the presumption, [he] argues, that the evidence would have been unfavorable to her position, and we agree.”
“It is the parties’ obligation to present the court with sufficient evidence of the value of the property. Reviewing courts cannot continue to reverse and remand dissolution cases where the parties have had an adequate opportunity to introduce evidence but have failed to do so. Parties should not be allowed to benefit on review from their failure to introduce evidence at trial.”
In Re Marriage of Banach, 489 NE 2d 363 – Ill: Appellate Court, 2nd Dist. 1986
When a business is part of the marital estate, courts generally don’t want to split the business interests. Instead, they prefer to award the entire business to one spouse and a cash offset to the other.
“Courts have generally found it unwise to divide a business interest in kind because it would necessitate an ongoing business association between the parties. Therefore, where property, such as a business, is not susceptible to division in kind or such division would be inequitable, the court may, in its discretion, award the property to one spouse, subject to an obligation to pay the nonacquiring spouse for the interest lost. Such repayment may be made by offsetting other marital property or by payment in cash, either in gross or installments.”
In re Marriage of Courtright, 155 Ill. App. 3d 55, 507 N.E.2d 891 (1987)
When courts value goodwill, they separate personal goodwill from enterprise goodwill. Personal goodwill should not be valued as part of the business because it is tied to the entrepreneur, not the business itself. Personal goodwill can be used to help determine earning potential when the court decides a maintenance award.
“The concept of professional goodwill is the sole asset of the professional. If goodwill is that aspect of a business which maintains the clientele, then the goodwill in a professional business is the skill, the expertise, and the reputation of the professional. It is these qualities which would keep patients returning to a doctor and which would make those patients refer others to him. The bottom line is that this is reflected in the doctor’s income-generating ability.”
“Although goodwill was not considered in the court’s valuation of the business itself, it was a factor in examining John’s income potential. To figure goodwill in both facets of the practice would be to double count and reach an erroneous valuation.”
In re Marriage of Foley, 163 Ill. App. 3d 1, 516 N.E.2d 455 (1987)
When goodwill of the business can be attributed to the entrepreneur, that is personal goodwill. If the goodwill of the business can be attributed entirely to the entrepreneur, there is no enterprise goodwill. This is commonly seen with businesses like law practices or small medical offices, where the reputation of the individual is the heart of the business.
“[The company] had no enterprise goodwill, since respondent’s continued presence in [the company] was pivotal to the success of the business.”
“The individual respondent is essential to the continuing operation of [the company].”
“[He] testified that the goodwill of [the company] rested with the respondent, with whom all of the customers did their business, rather than in the products or the service produced by [the company].”
In re Marriage of Scafuri, 203 Ill. App. 3d 385, 561 N.E.2d 402 (1990)
When a business has enterprise goodwill, or, goodwill that is not attached to the entrepreneur, that goodwill should be included in the valuation. This case offers positive subsequent approval of Wilson and Feldman.
“[T]his court has reiterated its position that goodwill does exist and should be included in the value of a professional practice.”
City of Chicago v. Anthony, 136 Ill. 2d 169, 174-75 (1990)
If you’re hoping to argue that your business’s land and assets hold more value than they appear, you will need to show the court a reason why. You may argue that a future use will bring more value to the land, therefore your business should have a higher value now. But, that possibility has to have a reasonable source, for example, if someone has recently leased space in your building.
Prospective future use may affect valuation if it “in fact enhanced the market value of the land in its present condition and state of improvement. The future prospective use affecting value must be a present capacity for a use which may be anticipated with reasonable certainty and made the basis of an intelligent estimate of value.”
In Re Marriage of Feldman, 557 NE 2d 1004 – Ill: Appellate Court, 2nd Dist. 1990
When courts value a business that has been deemed marital property, they consider four factors: fixed assets, other assets, the business’s goodwill, and the business’s liabilities.
“The court must consider (1) fixed assets, (2) other assets, including accounts receivable, (3) the goodwill in the business, and (4) business-related liabilities.”
In Re Marriage of Zells, 143 Ill. 2d 251, 572 N.E.2d 944, 1991
When valuing a business, the court must distinguish between the owner’s professional goodwill and the business’s enterprise goodwill. Goodwill is the intangible asset that explains why a business may be worth more than the physical property it owns.
Professional goodwill cannot be considered when valuing a business because they are tied to the owner, not the actual business. However, professional goodwill can be considered when determining a maintenance award because it helps indicate a spouse’s future income. Regarding a business, however, professional goodwill is not divisible as a marital asset.
“Professional goodwill is not subject to valuation, division, or distribution as marital assets”
“Adequate attention to the relevant factors in the Dissolution Act results in an appropriate consideration of professional goodwill as an aspect of income potential. The goodwill value is then reflected in the maintenance and support awards. Any additional consideration of goodwill value is duplicative and improper.”
In re Marriage of Hagshenas, 234 Ill. App. 3d 178, 600 N.E.2d 437 (1992)
When a court values a business, an important aspect of that business is their accounts receivable. Those accounts must be included in the total value because it is money that has already been earned. This case quotes and analyzes In re Marriage of Feldman’s principle here, and its positive subsequent approval.
“To determine the value of a business which is marital property, the court must consider (1) fixed assets, (2) other assets, including accounts receivable, (3) the goodwill in the business, and (4) business-related liabilities.”
In re Marriage of Hunter, 223 Ill. App. 3d 947, 585 N.E.2d 1264 (1992)
Courts must decide the value of a business by considering all factors presented to them; to otherwise createa an appeal based on the finding not being within the “manifest weight of the evidence.” Because an Illinois divorce court may consider all factors, especially from competing valuation experts, courts are not bound to use a single method of valuation, like the replacement-cost method. They may use a variety of methods and use their discretion to set a value for the business.
“There are several methods of valuing a small business, including the income and replacement cost methods. Baurer testified that her opinion was based primarily on the income method. While not stating specifically what method it used, the court obviously considered factors beyond the mere replacement cost of the [business’s] equipment.”
“[That] valuation was not against the manifest weight of the evidence.”
In Re Marriage of Olson, 585 NE 2d 1082 – Ill: Appellate Court, 2nd Dist. 1992
The value of your business’s stocks are not the only thing that determine a business’s value. Courts must consider all factors that add value to the business, like its future earning potential.
If you’re bringing in an expert to testify about the value of your business, they will need a sufficient level of experience. Testifying about valuing a prior business is not required.
“Precise rules for determining the value of closely held stock cannot be laid down, but rather all evidence reflecting the worth of the entity should be considered. Both the future economic outlook and the capitalization of future earnings are important tools for valuing a closely held corporation.”
The “argument that specific experience or training in valuation is necessary is without merit because valuation is merely a small part of the larger discipline of accounting…[E]xperience testifying is [not] necessary to be qualified as an expert witness. The act of testifying does not create the specialized knowledge of an expert witness, but rather the education, training or practical experience gained prior to testifying render a witness qualified to offer an expert opinion.”
In re Marriage of Tietz, 238 Ill. App. 3d 965, 605 N.E.2d 670 (1992)
Accounts receivable must be considered when valuing a business in an Illinois divorce. Accounts receivable are different from other types of future income because they already have a known value.
“Accounts receivable, however, are distinguishable because they are assets already earned with a known value but have not yet been collected.”
In re Marriage of Gunn, 233 Ill. App. 3d 165, 183 (Ill. App. Ct. 1992)
If you’re getting divorced and you own a business, it’s a good idea to hire an expert to value it. Courts rely heavily on expert testimony and consider every factor to value the business. The court can even decide how much weight to give each expert’s testimony, and will then decide what your business’s fair market value is.
“Placing a fair market value on the professional corporation is an art, not a science, and the court must rely on expert witnesses to assist it in this difficult task. There is no exact formula that can be applied, so the trial court must rely on experts who may differ significantly in both methodology and valuation. The trial court must consider the relevant evidence before it; determine the credibility of the experts, the reasonableness of their testimony, the weight given to each of them, and their expertise in the particular area of valuation; and then determine fair market value.”
In re Marriage of Kerman, 253 Ill. App. 3d 492, 624 N.E.2d 870 (1993)
If an expert valuator finds bad debts within a company, those debts should be considered when producing a final value for the court’s consideration. The court may also consider these bad debts when valuing the business.
“Petitioner’s expert also testified that if in fact, Goodyear was owed money, the adjusted book and fair-market value at which he had arrived would have to be reduced by the amount of that obligation.”
“We cannot say that a valuation difference of [the debt] would result in the same property distribution, especially when coupled with the improper classification of [several thousand dollars worth] of stock. Therefore, we remand for…revaluation of the tire business in light of the Goodyear liability.”
In re Marriage of Lee, 246 Ill. App. 3d 628, 615 N.E.2d 1314 (1993)
Accounts receivable must be considered when valuing a business because they are income that has already been earned. This case provides positive subsequent approval for Feldman, Hagshenas, Tietz, and Zells.
“Accounts receivable should be included in the valuation of a business.”
“The present case is distinguishable in that the trial court did not consider future income when valuing John’s business. Rather, the trial court considered accounts receivable which are past, but not yet collected, income.”
In Re Marriage of Werries, 247 Ill. App. 3d 639, 616 N.E.2d 1379 (1993)
If you want to argue that your business shouldn’t be divided at all, you must be able to show that it’s completely separate from the marriage. Your business should be as distinct from your marital assets as possible for the court to consider the entity nonmarital property.
“The issue is not the business’ form, but whether there has been an actual segregation of the nonmarital estate from the marital and whether adequate proof of the separation of business from personal assets is offered.”
In Re Marriage of Thomas, 608 NE 2d 585, Ill App Ct 3rd, 1993
If you own a small business with your spouse, the court will likely award the business solely to one spouse. Courts avoid splitting businesses between two divorced spouses.
“[W]hen the property at issue is a small business and the parties have shown that they cannot work together, it is better to award the business solely to one party or the other.”
In Re Marriage of Talty, 166 Ill. 2d 232, 239-40 (1995)
When the court considers the goodwill associated with a business, they may only consider enterprise goodwill, not personal goodwill. Whether goodwill is personal or enterprise depends on whether the customer comes back because of the individual owner or because of aspects belonging to the actual business.
Enterprise goodwill exists independently of an owner’s personal efforts and will therefore outlast his involvement with the business.
“To the extent that goodwill inheres in the business, existing independently of William’s personal efforts, and will outlast his involvement with the enterprise, [it should be treated as] “an asset of the business, and hence of the marriage… [Goodwill that is] personal to William, depends on his efforts, and will cease when his involvement with the dealership ends” should not be considered property.
In Re Marriage of Head, 273 Ill. App. 3d 404, 410-11 (Ill. App. Ct. 1995)
The courts consider experts’ testimony to be important to deciding the value of a business. If your and your spouse bring in conflicting experts, the court may arrive at a value for the business that’s somewhere in between the experts’ recommendations.
“When the record contains conflicting evidence regarding the value of a professional corporation, a trial court’s selection of a value somewhere between the opposing values in evidence is not considered arbitrary or against the manifest weight of the evidence. However, the trial court may only do so when the conflicting values are based on evidence supported by a proper foundation.”
In re Marriage of Blinderman, 283 Ill. App. 3d 26, 669 N.E.2d 687 (1996)
When you bring in an expert to value your business, he doesn’t have to be an expert in valuing your particular brand of business. He just needs to be an expert in the general field. For example, if you own an insurance agency, you don’t need to find an expert who specifically values insurance agency.
When valuing an insurance agency, the court approved of an expert’s use of a “rule of thumb” to value the business. This expert averaged the agency’s gross revenues and applied a 1.5 multiplier to value the business. The court said that his rule of thumb was accurate and accepted his value for the business.
“[H]e testified many times regarding the valuation of companies but never concerning the value of an insurance agency.”
“He arrived at that [value] by using a four-year average of R & R’s gross revenues and used a multiplier of 1.5, which is the commonly accepted rule of thumb for the price at which an insurance agency is sold. He added the net book value of the company and a federal tax refund to determine the final amount.”
Blackstone v. Blackstone, 681 NE 2d 72 – Ill: Appellate Court, 1st Dist. 6th Div. 1997
When experts testify in court, they may give their opinion on many factors that determine or modify the value of a closely held business. None of these facts are dispositive; the court must still weigh any expert’s opinion with other factors to determine the final value.
While the court has discretion to consider all factors when valuing a business, they also should not ignore expert testimony. The court of appeals in this case agreed that the expert’s narrow approach was flawed but that does not allow the judge to come up with their own independent valuation. They said that a trial court’s valuations should consider all the relevant factors and should fall within the range testified by the experts.
“In valuating a closely held corporation, an expert witness may take a deduction for its unmarketability, but such a deduction is not mandatory…Nor has ‘book value’ ever been found to be a particularly good measure for appraising the fair value of a corporation”
“[I]t would be a mistake…to focus myopically on any [single] given valuation method or financial aspect of [a closely held corporation] in arguing its fair value to the marital estate.”
“So long as the trial court’s valuation of marital assets is within the range testified to by expert witnesses, it will not ordinarily be disturbed on appeal”
In re Marriage of Reppen-Sonneson, 299 Ill. App. 3d 691, 701 N.E.2d 1159 (1998)
A party may bring financial documents to help value their business in court, but a financial document alone is insufficient for the court to find a value. It is the parties’ duty to bring an expert to testify. If a party doesn’t bring an expert, the court may simply follow the opposing expert’s valuation, though they will still weigh the testimony with other factors to provide a final valuation. In short: bring an expert!
“It is the parties’ obligation to present the court with sufficient evidence of the value of the property.”
“The only evidence offered by [her] concerning the value of [the company] was a profit and loss statement which had been submitted to the bank for the purpose of obtaining a loan. [She] never explained how this document reflected on the true market value of [the company].”
When there has been a cash buy-out, or even an offer of one, for your company, a court will determine the threshold for a valuation. The court can also consider cash payments already made and will conservatively adjust for the business’s growth over time. That threshold can be added to by trial courts to find a precise number for the value, but they cannot decide on a number below the threshold.
“We conclude that a most conservative valuation of GSP suggested by the record, taking into account the experts’ valuations, the Simonek [buy-out] and the company’s sustained growth since 1989, cannot be reasonably set below $816,240. This figure is not only supported by the financial evidence but also within the range of values suggested by the experts.”
In Re Marriage of Cutler, 334 Ill. App. 3d 731, 737 (2002)
In order for a divorce court to pick a value between the two competing experts’ business valuations, both of the valuations must be based on valid evidence. An Illinois divorce court cannot pick a number between the two valuations if “one of the conflicting values was not based on evidence supported by a proper foundation”
In Re Marriage of Schneider, 214 Ill. 2d 152, 824 N.E.2d 177 (2005)
If you owned or joined a business after your got married, that business interest is marital property. The portion of the interest acquired after the marriage is divisible.
When courts consider goodwill, they can consider personal goodwill as a basis for maintenance because it speaks to a spouse’s future earning potential. It cannot be used to value a business.
Another aspect of a business that’s essential to valuation is the accounts receivable. Those services have already been performed and the business has earned the assets; it’s not speculative future income. Those assets have a known value and contribute to the business’s overall value.
“The business interest of a spouse acquired subsequent to marriage constitutes `marital property’ subject to equitable distribution upon dissolution.”
“[P]ersonal goodwill, if used as a factor in calculating income potential, on which the maintenance and support awards are based, cannot also be used as a divisible marital asset.”
“[Courts must consider] assets that have been earned and have a known value.”
In Re Marriage of Alexander 368 Ill. App. 3d at 198-200 (2006)
When experts consider goodwill to value a business, they can use various devices. One method used by experts is the Multiattribute Utility Model (MUM). The model allocates a business’s goodwill between personal and enterprise goodwill by sorting different business aspects into categories.
Personal goodwill includes the individual’s specialized knowledge, a personalized business name, the individual’s personal reputation, transferability, and incoming referrals.
Enterprise goodwill includes aspects like the business location, whether the business has multiple locations or service providers, how many years the business has operated, the business’s staff, outbound referrals, and marketing.
The expert must decide what earnings and relationships may stay with the business and which would leave with the owner. After sorting the aspects into categories, the expert will score each side. The combined scores provide estimated percentages of personal or enterprise goodwill, which can then be added to the value of the business.
“At this point, the valuator has before him or her what percentage of the total goodwill is personal goodwill and what percentage is enterprise goodwill…the valuator is then to “evaluate the alternatives” by examining where the final results fit into the range of alternatives that was established at the beginning of this methodology. The valuator also must analyze his or her conclusions by looking at each attribute individually in light of the attribute’s total contribution to the total utility, and the valuator must ask himself or herself if certain attributes should be “driving the results.” After performing this analysis, the valuator then reaches his or her ultimate opinion.”
In Re Marriage of Joynt, 874 NE 2d 916 – Ill: Appellate Court, 3rd Dist. 2007
Retained earnings are profits that are retained for future business expenses and investments. If your business has retained earnings, those aren’t considered income until they’re actually distributed to the business owners. That means they are not considered when discerning the business’s income.
But, if the business-holding spouse is an owner or manager that can decide when the business pays out the retained earnings, those earnings are marital property. But, if they can’t make those decisions for the business, the retained earnings are not marital and cannot be divided in the divorce.
[R]etained earnings and profits of a subchapter S corporation are a corporate asset and remain the corporation’s property until severed from the other corporate assets and distributed as dividends.”
“If the shareholder spouse controls the corporate distribution, the retained earnings are marital property…Because, [a business partner spouse] was unable to authorize a payment of the retained earnings as a dividend without shareholder approval and because the earnings were a corporate asset, we hold that the retained earnings account of the corporation is a nonmarital asset.”
In Re Marriage of Schmitt, 909 NE 2d 221 – Ill: Appellate Court, 2nd Dist. 2009
As a general rule, property and business acquired after a marriage are marital property. However, if you can prove to the court that you purchased said property or business with nonmarital funds, you may be able to retain the business as a nonmarital asset for yourself. You must be able to show precisely where the funds came from and that they did not touch marital accounts.
“Real property and business interests acquired after marriage are presumed to be marital property unless they were purchased with nonmarital funds.”
“[B]ecause [he] failed to show that the funds from his interest in Colonial were not attributable to his personal efforts, these funds are presumed to be marital property.”
Brynwood Company v. Schweisberger, Ill: Appellate Court, 2nd Dist. 2009
When you bring an expert to testify about the value of your business, he doesn’t have to be well-versed in valuating that particular business. As long as the court thinks he has sufficient general experience in valuation, his testimony will be considered.
“[E]xperience in valuing a certain type of business is not required to qualify an expert in valuation of other types of businesses”
In re Marriage of Hanusin, 2013 IL App (2d) 130339-U
If there has been a buy-out in place of offered, the court may use that to determine a business’s value. This agreement must have been somewhat recent. Here, the agreement from 2004 was approved to inform, with other factors, current business value. This case offers positive subsequent approval for Grunsten.
“’Although valuation of a closely held corporation is subjective in nature, the process is obviously much less so when done with the benefit of viewing a similar transaction, particularly when the comparison transaction involved the same property, This is because fair value is best measured by what a willing buyer would pay a willing seller in a voluntary transaction.’ In this case, the 2004 SPA involved a willing seller and willing buyers. It is thus relevant evidence…”
In re Marriage of Burstein, 2014 IL App (2d) 130098-U
If your expert is poorly informed about business valuation methods, like the importance of a fair-market value, the court is unlikely to consider his testimony. In this case, the expert performed so badly that the court openly criticized him and then took only the opposing expert’s testimony into account when considering the final value of the business.
“[The expert] testified that he could not say for sure. When asked why fair market value was important, [he] testified that his ‘understanding in valuing businesses was Illinois requires a fair market value of the interest.”
“The [trial] court stated, ‘if I had something else from your expert other than ‘I don’t know what the fair market value is,’ then you’d be in a better position, but that’s what I got.’ The trial court ultimately said that ‘if I’m left without a valuation, then I’ll come up with a way to allocate the assets that protects both sides.’”
In Re Marriage of Schlichting, App Ct 2nd 2014
If you own a closely held corporation, it’s likely that you have a detailed operating agreement to run the business. Within that agreement, you can contract for the valuation of the business in advance, so long as the nonmember spouse has the option to contest that valuation.
If you choose to add the valuation to the operating agreement, the best way to make sure it applies in court is to expressly address divorce in the agreement.
“[A closely held corporation’s] operating agreement is to be enforced according to general contract principles, unless it conflicts with a statute.”
“We see no reason why the trial court should have entered an order that conflicted with the terms of the operating agreement when the operating agreement specified the valuation process in the event of a divorce and allowed for the nonmember spouse to contest the valuation during divorce proceedings.”
In re Marriage of Moorthy and Arjuna, 29 NE 3d 604 – Ill: Appellate Court, 1st Dist. 5th Div. 2015
If your business has retained earnings, it’s important that you are transparent about their intended use. Retained earnings that are actually for future expenses will be honored, but if you’re counting money as retained earnings to avoid paying a higher maintenance award, the court will find out.
The general rule is that retained earnings are legitimate when they are necessary for the business and not excessive. However, the court will consider several factors to determine whether the earnings are legitimate. The factors include how many shares the spouse holds, whether the earnings are excessive, the spouse’s ability to decide when retained earnings are distributed, and whether there’s evidence that funds are being manipulated.
“[C]ourts should engage in a case-by-case, fact-specific analysis to determine whether retained earnings of a corporation should be imputed to the sole or majority shareholder for purposes of calculating child support. Relevant factors in this analysis include: (1) the extent of the obligor’s ownership share in the corporation, (2) the obligor’s ability to decide whether corporate earnings should be retained or distributed, (3) the corporation’s history of retained earnings and distributions, in comparison to post-divorce corporation activities, (4) whether the retained earnings are excessive, and (5) whether there is evidence that income is actually being manipulated…[H]eightened scrutiny is appropriate when the obligor has the power to control distributions, but this, in itself, is not dispositive of whether a subchapter S corporation’s retained earnings must be included in an obligor’s income when calculating child support.”
“Retained earnings [are] necessary and appropriate business actions and [are] not excessive…it would be unfair to the obligor to include in the calculations of income for child support the retained earnings necessary for the continuing viability of a corporation and thus not available to the obligor.”
Freihage v. Freihage, 2015 IL App (3d) 130277-U
If your business is a franchise that has debt incurred from a marital trust, the court may treat that debt as either marital or business debt. Either way, it will severely skew the value of a franchise. In this case, two experts testified about the value of this franchise, but one included the debt while the other did not. The court considered both testimonies and decided on a value within the range of both experts. (Note: This is a rule 23 case that is persuasive but not controlling)
“[The expert] elected to exclue the debt to the Marital Trust, and instead considered that amount as business equity, based on his review of two franchise loan agreements from Chase Bank, which indicated McDonald’s treated the trust-related debt as equity for purposes of total business equity.”
“[W]e conclude the trial court’s decision to treat the [debt] in distributions from the Marital Trust as business debt was not contrary to the manifest weight of the evidence, since some payments on interest and payments on principal supported the court’s conclusion hat this amount should not be treated as business equity, but rather as debt.”
In re Marriage of Johnson, 2016 IL App (5th) 140479
When valuing a business, many experts may use the MUM (multi-attribute utility model), but that’s not the final say on a business’s value. Valuations must be precise, so a court will also require an overall fair-market value analysis to complete the valuation. While MUM analyses are valuable, they are just one factor for courts to consider when deciding value.
“However, the objective of the multi-attribute utility model is to conclude what portion of the total goodwill/fair market value constitutes enterprise goodwill and personal goodwill; it does not address the overall fair market value of the business before the discount for personal goodwill.”
“[F]air value is best measured by what a willing buyer would pay a willing seller in a voluntary transaction.”
In Re Marriage of James, 2018 IL App (2d) 1700627
When you purchase property or start a business after your marriage, that business is marital property that can be divided in the event of a divorce. If you try to use nonmarital funds to purchase it, the business is still considered marital unless it falls under a statutory 503(a) exception.
That exception traces the funds used to purchase the business, and if the funds are truly nonmarital, the court may consider the business nonmarital property. But if the funds are comingled with the marital accounts or estate, the business will likely be considered marital. The tracing process looks at exactly where the funds came from and how they were stored to determine whether the business is marital.
“Tracing of funds is a procedure which allows the court to find that property which would otherwise fall within the definition of marital property is actually nonmarital property under one of the statutory exceptions.”
“Tracing requires that the source of the funds be identified.”
In re Marriage of Preston, 2018 IL App (2d) 170656-U
An expert may use the MUM method to provide their opinion on the business’s value. The MUM distinguishes between enterprise and personal goodwill, because only enterprise goodwill may be used for valuation. This case offers positive subsequent approval for Alexander and Talty. (Note: This is a Rule 23 case which is persuasive but not controlling).
“While enterprise goodwill is considered a marital asset for the purposes of the just division of marital property, personal goodwill is not.”
In Re Marriage of Warner, 2020 IL App (3d) 190198
If your business is “combined” with property, like a farm, for example, the value of the property may affect asset division. In this case, the wife was awarded the farm and ordered to pay a cash offset of $200k either by loan or partial sale of the farm. The wife couldn’t succeed, so the court ordered a sale for the entirety of the farm.
Here, even though the wife was awarded the farm, she couldn’t keep it because she couldn’t afford the cash offset to provide an equitable division between her and her ex-husband.
If you can’t afford the cash offset ordered by the court, you may lose your business.
“[T]he circuit court allowed [wife] flexibility with respect to her approach for securing $200,000 to pay [husband] his equitable distribution in settlement of the marital estate. However, by all accounts, it became unfeasible for [her] to partially sell the farm or secure a loan to pay [him] his $200,000 equitable distribution. Consequently, the original judgment required [wife] to sell the entire farm.
“[T]he circuit court was enforcing [wife’s] obligation under the original judgment to sell the entire farm and settle the marital estate.”
In re Marriage of Trapp, 2022 IL App (3d) 210291-U
If you don’t offer evidence of your business’s value, most commonly and most convincingly through an expert, you cannot later argue that the value is incorrect. It is the parties’ job to bring evidence of value to the court. This case offers positive subsequent approval of Reppen-Sonneson and Leff. (Note: this is a rule 23 case and is is only persuasive not controlling)
“The burden of presenting the court with sufficient evidence to equitably value and divide marital property falls on both parties.”
“While a more current valuation would have been useful, due to the circumstances of the delay and the wife’s failure to seek her own valuation, we cannot say that it was against the manifest weight of the evidence for the trial court to accept [the opposing expert’s] valuation.”
In re Marriage of Bornhofen, 2023 IL App (1st) 221194-U
When an expert offers their opinion, may often analogize to other businesses. However, they cannot analogize to businesses that are not of the same market. Here, the expert tried to analogize this company to other software companies, claiming they were similar enough, but the this company is not a software company. The court rejected this valuation in favor of the opposing expert’s opinion. The said that an analysis should be made for fair market value; analogies are not necessary, especially if the companies are completely different.
“[A]ll assets must be valued under the fair market value standard, and a closely held business such as iTouch invariably begins with Revenue Rule 59-60 and the principles contained therein.”
The court also commended one expert for evaluating the closely held business using the suggested factors under Revenue Ruling 59-60. That ruling provides the following factors:
“(a) The nature of the business and the business and the history of the enterprise from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.“
In re Marriage of Rozdolsky 2024 IL App (2d) 220423-U
The court can order payments in lieu of a lump-sum payout for a spouse’s share of a marital business. Any payments must be subject to a mandatory 9% annual interest on the unpaid portion of non-business owner’s share. (Note: this is a rule 23 case and is only persuasive and not controlling).
In Re Marriage of Marie, 2026 IL App (4th) 250184-U
Finally, when a court is deciding whether or not your retained earnings are legitimate, expert testimony can be important to their decision. Courts will consider expert testimony that discusses whether those earnings are necessary for the business. (Note: this is a rule 23 case and is only persuasive and not controlling).
“Expert testimony may be helpful and relevant in establishing ‘the level of retained earnings that are appropriate for the corporation to carry on its intended purpose.”
In Re Marriage of Howard 2026 IL App (1st) 252439
In a default prove-up of a business owner, your testimony as to the value of the business is sufficient to establish that value. No supporting documents need to be provided to the court to verify the petitioner’s testimony.
Do you have a business that may be valued by an Illinois court? If so, you deserve to consult with the only Illinois attorney who ever bothered to read and compile every Illinois case about valuing and dividing businesses in an Illinois divorce. Reach out to me today to schedule a free consultation.
