Divorce and Business Valuation

Jodee Redmond
Business valuation may be an important concern as you're preparing for a divorce.

When it comes to issues surrounding divorce, business valuation is often an important concern. The business may be considered marital property and as such, it is subject to division. In order to divide the business in a fair and equitable manner, however, the value of the business must be determined.

When it comes to divorce and business valuation, the person who is involved in the day-to-day operations of the business may well understate the value of the business. The other spouse would do well to seek an independent evaluation, as opposed to relying on his or her former spouse to provide this much-needed information.

Finding an Appraiser

There are a number of professionals who can help to determine the value of a business. These experts include:

  • Business appraisers
  • Certified public accountants
  • Business brokers
  • Financial analysts

An accountant may seem like the best choice, but this may not be the case. The role of the accountant is typically to work with numbers looking backward, but a divorce business valuation needs to take into account the future earning potential of the business. To get expert advice with respect to divorce business valuation, contact the Institute of Business Appraisers to find a qualified individual in your area.

A professional business appraiser will prepare a detailed report setting out the steps taken to determine the value of a particular business. During the process, the appraiser may have to make some assumptions about the business or the type of industry to which the business belongs. If the appraiser follows accepted standards for the profession, his or her evaluation should be similar to that of another appraiser using comparable methods.

Divorce Business Valuation in Mediated Proceedings

The services of a business appraiser are still used in the case of a mediated divorce. Both parties may choose to share the cost of a joint appraisal, rather than each person retaining his or her own expert. This course of action will result in a significant reduction in cost of the proceedings.

How Value is Determined?

A number of factors are taken into consideration by the expert when preparing a divorce business valuation. The value of the company's assets and the sum of its liabilities must be determined. In addition, the company's past earnings history must be tracked. Once these figures have been determined, a projection as to the company's future earnings will be made in order to arrive at a figure reflecting the value of the business.

Dealing with a Business

After the divorce business valuation is completed, there are three basic courses of action the parties can take:

  1. Both parties can continue working in the business.
  2. The business can be sold and the proceeds divided between the two former spouses.
  3. One spouse keeps the business and gives the other one a payout based on equity in the matrimonial home or some other asset. In this way, the spouse who is not the business owner is compensated for his or her interest in the business.

The Importance of Having a Business Valuation Done

The following Minnesota case emphasizes the importance of having an independent divorce business valuation prepared:

Debra Sax married Paul Taunton in 1994. Taunton was the owner of a business called Athletic Fitters, Inc. (AFI). Taunton told Sax that the business was worth $6 million and his salary was in the range of $250,000.00-$300,000.00 per year.

Sax filed for divorce in 1997. Both parties wanted issues involving division of marital property settled without delay. Sax agreed to a divorce settlement based on what Taunton had told her regarding the value of the business and his yearly income.

Unfortunately for Sax, Taunton had greatly under-represented both the value of the business and his personal income. A few months after the divorce was finalized Taunton sold AFI for $30 million. A post-divorce investigation revealed that Taunton's monthly income was $900,000.00 in 1994 and went up to $4 million per year by 1996.

Sax sued Taunton's attorney, Kathleen Picotte Newman. Sax alleged that Newman's firm had misrepresented the facts of the case. (Newman's firm was responsible for negotiating the terms of the business sale.) Legal experts do not expect Sax to win her case, since Sax chose not to have an independent divorce business valuation conducted and relied on information provided by Taunton and his attorney.

Divorce and Business Valuation