The Asset-Based Approach to Business Valuation in Family Law (Part II of III): The AA Method

This three-part article focuses on the asset-based approach to business valuation in family law cases. Part I, which appeared in the last issue of the American Journal of Family Law (AJFL), set forth background and general considerations, when to apply this method and some special topics such as the valuation of liabilities and income taxes. Part II discusses the Asset Accumulation (AA) method and will include an illustrative example. Part III, which will appear in the next issue of AJFL, concentrates on the Adjusted Net Asset Valuation (ANAV) method and contains several illustrative examples.

The previous part of this three-part article introduced the theoretical concepts and the practical applications of the asset-based business valuation approach. This part describes and illustrates one of the two most common asset-based approach valuation methods: the AA method. The next part describes and illustrates the other common asset-based approach valuation method: the ANAV method. The AA method and the ANAV method are both generally accepted business valuation methods of the asset-based approach. And, along with the income approach and the market approach, the asset-based approach is a generally accepted business valuation approach.

AA METHOD IN FAMILY LAW CONTEXT

The AA method is well suited for valuations performed for family law and other controversy purposes. All business valuation approaches and methods can indicate the defined value of the subject business entity. In addition, the AA method helps to explain that indicated value by specifically identifying the value impact of each category of the subject entity assets and liabilities. This informational content of the AA method is particularly useful in a family law context when the analysis is used to identify:

* Which asset categories are contributing how much value to the total entity value;

* Which asset accounts serve as the collateral for each secured creditor;

* Which asset accounts are available to serve as collateral for future secured financing;

* Which asset accounts are available to be sold off from the business entity core operations;

* Which asset accounts are available to enter into either a lease or a license transaction;

* What would be the asset revaluation-related income tax consequences of alternative transaction structures for the sale of the subject entity;

* What the opening balance sheet would look...