Marital Dissolution (Business Valuation)
It is imperative for attorneys to understand the role of a business valuation in divorce matters so that they can better advise their clients to achieve their goals in asset division and financial support. If a business is deemed marital property, and therefore subject to division, the value of the business must be determined to divide the marital estate fairly and equitably.
As a basic premise, there are two primary financial questions in a divorce matter.
What are the assets and liabilities of the marital estate?
What is the income available for support?
In some divorce cases these two questions could be answered without retaining a business valuation firm. However, in cases where a business (or several) is owned by the marital estate, the complexities increase exponentially.
Why obtain a business valuation?
The value of a business is almost always a difficult issue in marital dissolution. Income earned from the business also becomes an elusive issue that often requires extensive discovery and analysis.
It may surprise divorcing couples who own a business that the business will need to be valued for purposes of determining an equitable asset split. If it is not a large enterprise, they might perceive the valuation as unnecessary, however, this is typically incorrect. To the degree that the business has goodwill, it could be subject to the asset split.
The extreme of expectations between the “out-spouse” and the “in-spouse” are a primary factor driving litigation in this area. The gap is often due to the difference in knowledge about the activities of the business and mistrust that the financial information provided is accurate. The spouse that will retain the business regularly insists that all revenue has been reported and all expenses are true business expenses. Suspicions on the other side revolve around revenue being underreported and personal expenses being deducted as business expenses to decrease profits.
If the business value is going to be treated as a marital asset, it is important that the business profits or income stream is not considered for spousal support or child support. The income stream cannot be used to calculate a value and calculate support payments. To include both in the marital estate would be a double dip. It should be noted that this refers to business income or profits and not wages paid to the owner for their work. Any wages or compensation that are expenses of the business could still be used for a support calculation.
In a recent marital dissolution, Cogence Group was engaged to provide a business valuation for a husband’s legal practice. The husband was a solo practicing attorney, with no other employees. We reviewed the practice’s financials and determined the business had no value as it was all tied up in the husband’s personal goodwill. The value of the business was completely tied to the husband’s professional expertise and was not transferrable. Additionally, it was illogical to divide the business 50/50. As a result, instead of providing a business valuation, we performed a calculation of the annual cash flow stream to help the trier-of-fact determine spousal support. Cogence Group’s experience in preparing numerous valuations of privately held companies provided the essential knowledge and expertise required to shape the attorney’s strategy and deliver a well-documented, supportable marital dissolution valuation.
Call Cogence Group today to learn more about our experience working with business valuations within the context of divorce.