§2.09 Closely Held Corporations

No one formula may be applied to all factual situations in which you must value shares of a closely held (or close) corporation. [Marriage of Hewitson (1983) 142 CA3d 874, 888.]

One method experts use is to assess worth on the basis of "investment value." Three basic approaches that have been recognized in determining the investment value of closely held shares are [Marriage of Hewitson, supra, 142 CA3d at 881-882 nn3-6]:

• Capitalization of earnings,
• Capitalization of dividends, or
• Book value or net asset value.

Another method is to establish a "hypothetical market value" for the shares. A hypothetical market value is used because close corporation stock is not actively traded and has no established market value. Experts use two approaches to establish hypothetical market values [Marriage of Hewitson, supra, 142 CA3d at 882]:

• The recent-sales approach, or
• The price-earnings ratio approach.

You may not rely solely on an expert opinion based on the price-earnings ratio of publicly traded corporations because of the differences between publicly held and closely held corporations. [Marriage of Hewitson, supra, 142 CA3d at 885-886.]