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June 2018 Tip of the Month

Finding the Value of a Business in a Divorce

Ever wonder what the designation, CVA, means often found after the names of forensic accountants like Marty Abo? Certified Valuator Analyst and it’s an accreditation earned through NACVA – National Association of Certified Valuators and Analysts. For some 15 years now, Marty has attended NACVA’s annual conference to listen and learn from some of the most renowned speakers in the business valuation and financial litigation field while connecting and learning from other valuation and consulting professionals in attendance.

Hot off the plane (well, actually on it during Friday’s four-hour flight delay) after interacting with some of the best and brightest colleagues from all over the country, Marty is “pumped”. What forensic accountant wouldn’t be after updating sessions in divorce, economic damage measurement, personal injury/wrongful death computations, business interruption claims, business appraisals, effects on all from the new tax act – you name it.    

Now that Marty has attempted single handedly to disqualify every top business appraiser from New Jersey and other states, he thinks it’s safe to discuss (I love you Jane). On top of all the other complex, difficult processes involved in a divorce, if one or both spouses own a business, you should add a valuation. A divorce valuation goes by special rules. For example, one aspect of finding value for a divorce settlement is that you are not seeking the investment value of the business. Because the business usually isn’t going to be sold, its value to a specific buyer isn’t particularly relevant. For this reason, the value decided on for a divorce is different. Many of the considerations are the same as for determining the sale value, but there are some substantial differences.

 

What Value Are You Seeking?

 

A divorce settlement includes the concept of equitable distribution, which isn’t a factor under a fair market value premise. The meaning of equitable distribution varies from state to state. The general idea is that the settlement is decided by the court, which is supposed to determine the most equitable distribution. By contrast, in a sale the parties are presumed able to look out for themselves.

 

In judging what an equitable distribution is, the courts often consider the following:

 

Goodwill. Any elements like professional goodwill may be a significant part of the business, but the courts’ stand on whether goodwill is considered a divisible asset varies considerably. This could have an important effect on the value of the business.

 

Intangible value. What about intangible value? Ordinarily, the value of intangibles is based on how much they are expected to contribute to future earnings. This too needs to be considered when valuing a business for divorce purposes.

 

Discounts. Some courts in certain states have expressed reluctance in divorce cases to allow various discounts common to fair market valuations. The most important discounts -- the lack of marketability followed by the minority interest -- are harder to justify when no actual sale is contemplated. These can also include a “key person” discount if that person is one of the spouses and he or she intends to continue working in the business. In addition, some courts, depending on the unique circumstances of the particular case, may not allow discounts for difficulties in getting financing for a buyout, or for poor product diversity or unaudited financial statements. They would argue that these problems are germane only to potential buyers.

 

Supporting the Value in Court

 

If the divorce goes to court, the valuator must persuade the court that his or her figure is the most accurate. Whatever method the valuator uses, it must be supportable. Unsubstantiated numbers don’t hold up in court.

 

There’s widespread difficulty in discovering a business’s true worth for divorce valuations. Business owners who refuse to provide documentation to their spouses’ financial advisors can be penalized by the courts, but this doesn’t guarantee total honesty. Valuators respond by coming up with creative methods of uncovering information.

 

Some business owners may deliberately try to undervalue their companies to minimize their spouses’ settlements. Deliberately minimizing or even dissipating the value of a business can be hazardous, even if the financial expert can’t prove the profits were larger than stated.

 

Some divorcing spouses attempt to use the amounts of key person insurance on the spouse involved in the business or the terms of a buy-sell agreement as indications of the worth of the business. The agreements and insurance policies could have been set up years before, though. They don’t necessarily indicate the business’s worth at the time of the divorce. Nonetheless, the courts consider buy-sell agreements a factor.

 

Get Help to Find the True Value

 

Juggling the many factors that make up a divorce valuation is a specialized area of a business valuator’s practice. Call us at Abo Cipolla Financial Forensics if you anticipate needing a business valuation as part of a divorce settlement. If you are already a client and we may very well have a conflict of interest, we would be happy to recommend one or more independent colleagues who also practice in this business valuation arena (and in just about any of the fifty states – a nice side effect of so participating in NACVA’s annual conferences for some 15 years