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Business Valuation in Divorce Proceedings

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Almost all court cases require certified business valuations

A divorce not only ends a marital relationship, it can end a family business relationship.  Even if only one spouse has actively participated in a business, the non-participating spouse may have a community property interest or a claim for the use of community funds. If negotiation or courts are needed to determine the agreement of the business value, a certified business valuation might be imperative, especially due to the fact that courts have broad discretion in how to determine the business value.

 

Spousal Agreement

When a business is small with a low value and the spouses can agree on its worth, then the parties can simply agree on a business value. With a larger or more complex business, especially when spouses cannot agree on the business value, accurately valuing a business can be one of the important parts of a divorce proceeding. When a business has substantial goodwill, the value of a business over its assets, it becomes even more important to get a certified business valuation.

 

Lower Cost Option

To lower the costs associated with needing a valuation, the parties attorneys may consider hiring one well-respected business appraisal company to offer an objective opinion as to the value of a business. We can provide this option.

 

Objectivity Needed

Spouses who own their own business often have strong personal feelings as to the value of their business. Sometimes it is difficult to think of splitting the value of a business that they have worked hard for and still retain a viable company. In our experience, the spouses’ idea of value is rarely accurate. Many times in divorce cases, their belief is that their business is worth less than it is, due to the need to split the value with a spouse. This is different from selling a business not involved in a divorce, where the owner generally wants and believes the business value to be high. Therefore, it is almost always desirable to objectively determine a reasonably accurate value for a business involved in a divorce. A divorce mediator or judge will appreciate objectivity.

 

Business Valuation Date

The business will be valued as of a certain date in time. This date must be agreed upon before starting the valuation process. In California, businesses are commonly valued at the date closest to trial. However, alternate dates, such as the date of separation of the parties may be considered depending on the circumstances of the parties. To use an alternate valuation date, (other than a date closest to trial) one may have to show cause and obtain a court approval. Because a business’s value can fluctuate significantly from one date to another, the selection of a date of value is a very important milestone. It is not unusual for a business’s value to increase or decrease significantly post-separation due to external factors such as the economy or to intentional actions by the spouse operating the business to depress value. Different dates of value may also require the use of different valuation metrics, e.g., using higher or lower price/earnings and price/revenue multiples.

Divorce Valuation Process

Family law attorneys and appraisers need to spend significant time learning the workings of the business. It is imperative that both the attorney and the appraisers have a comprehensive understanding of how the business works. This can be accomplished in many ways. Onsite visits of the company and/or company locations are the first step in learning about the business. Both the attorney and the expert should visit the company to see how the company functions on a day-to-day basis. What better way to learn about a business than to see it yourself? The appraisers and forensics will also conduct management interviews with individuals such as majority shareholders, president, vice presidents, chief of operations, marketing personnel, and bookkeepers or the financial department, to obtain information to assist in determining a value. Appraisers and attorneys review all pertinent financial and legal documentation to identify and value a business. Legal documents provide an understanding of how the business is set up. For example, whether it is intertwined with other companies, whether the company owns real property that would also need to be valued, or whether the business rents back the real property to itself for a fair price. These types of related-party transactions often distort the value of the business and must be verified and adjusted, if necessary, to ensure that the valuation is accurate and does not favor either party.

 

Expert Witness

We have been acknowledged as an expert witness in several jurisdictions. When needed to give support for negotiations or testify in a divorce court case, it is imperative that your business appraisal expert witness be able to explain the complexity of a business valuations in a clear and concise manner. Judges, and many times lawyers, are not experts at business appraisal practices and methodology. We plan the business valuation engagement as if we will be an expert witness for your case.

 

Methods Used

We use all 3 of the generally accepted approaches to value the business, namely asset, income and market approaches. Each approach can have one or more valuation methods. We use up to 5 methods in our valuations. We research and strategize the actual methods used for your case.

 

Ownership Characteristics

We make adjustments to the value based on different ownership characteristics:

  • Controlling v. Minority Interest

  • Ownership structure (C-Corp, S-Corp, LLC, sole proprietor, etc.)

  • Marketability v. Non-Marketable

  • Key Person dependency

  • Key Customer dependency

 

Double Dipping

We address any double-dipping issues exist and adjust the business valuation accordingly. Double dipping, resulting in a higher business appraisal, can occur when the valuation includes owner compensation.

 

Certified Business Valuation

To obtain objectivity, parties to a divorce proceeding many times need to hire a professional certified business appraisal expert to assist their attorneys in determining the value of businesses. As a certified business valuation firm our team has the education, training, knowledge and experience to determine the value of businesses to a reasonable degree of accuracy.