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Business Valuations in Divorce

During the divorce process, there are a great many financial issues that often need to be addressed including the need for a marital lifestyle analysis, the impact of investment income on support, Innocent Spouse Status, unreported income, the filing of joint or separate income tax returns while the parties are going through the divorce process, passive or active appreciation (or depreciation) of assets and many other financial issues. However, one of the most common financial issues that we see in divorce cases is the identification, valuation and distribution of ownership in a business. When the stock in a company is publicly traded, it is obviously easy to value. However, closely held businesses require a business valuation expert specially certified to do business valuations. The parties to a divorce can either select a single “joint” expert or they can each select an expert of their own choosing. Often, if a spouse has had no involvement in the business and therefore has no knowledge of its internal finances, that spouse will want to retain his or her own expert. Alternatively, when both spouses are sufficiently involved in the business, then a single joint expert is going to be less expensive and less time consuming. This choice will be made with the assistance of counsel. Even if the parties retain separate experts, the two experts will communicate during the valuation process and will attempt to agree on a value to which they can both stipulate after they have completed their investigation and analysis but before the reports are written. This approach both protects the uninvolved spouse and also saves the parties (1) time; (2) the stress of arguing over value; and (3) money for the cost to write the reports and for the attorneys to litigate value. Just as in all other types of litigation, the valuation process during a divorce begins with discovery. If the parties are sharing an expert, then that expert will simply obtain the documents from the business owner and begin the process. If the parties are retaining separate experts, then experts provide the respective attorneys with either a short list of the initial documents they will need in order to begin their analysis or a lengthy list of every conceivable document they might need to conduct the valuation. Often this decision depends upon the degree of cooperation they are expecting from the business-owning spouse based upon their discussions with their client. Cooperative business owners who provide the requested documents to the opposing party’s attorney save everyone time and money; uncooperative business owners who don’t provide the requested documents cause their spouse’s attorney to apply to the Court for an Order compelling their cooperation and usually end up paying the cost for those applications to the Court out of their own pocket and not from the marital estate. After the documents are obtained, whether voluntarily or by Court Order, the valuation expert will interview the business owner or owners to obtain information and they will conduct a site visit. Additional documents may be requested as the process unfolds and the valuator learns more about the business. Prior to writing the report, among other things, the valuator will do a historical financial analysis of the business. He or she will normalize income by making adjustments (for example add-backs for personal and non-recurring expenses), determine reasonable compensation and obtain industry data to compare the subject company to the industry, if possible. As part of the valuation process, the valuator will also select an approach to determining value: the asset or cost approach, the market approach, and the income approach. It is up to the valuator to decide which approach is the appropriate one in each case, depending upon the facts. The final report will explain each approach and then will explain why one approach was selected and the others were rejected. After the valuation is completed, if necessary, a lengthy report is written and provided to the attorneys. With their attorney’s assistance, the parties must then decide how to distribute the business asset. In New Jersey, case law strongly dissuades the Courts from ordering that the non-owning spouse retain stock in the company after a trial. However, if the divorcing parties wish to reach an agreement whereby the non-owning spouse retains stock, they can do so at their own peril. Usually, the parties agree upon a buy-out, which may be in a single lump sum or over time. If the buy-out takes place over time, it needs to be secured and usually includes interest at current rates.

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