Business Valuation Blog | Understanding Buying / Selling a Company

In many divorce cases, a business is one of the most significant marital assets. Whether it's a family-owned enterprise, a professional practice, or a sole proprietorship, its value must be determined to facilitate asset division. The valuation outcome can affect property settlements, spousal support, and overall financial planning post-divorce.

Factors Influencing Business Valuation in Divorce

Courts and financial experts consider various factors when determining a business's value, including: Ownership structure: Whether the business is solely or jointly owned can impact its classification as marital or separate property.

Level of involvement: A spouse's active role in business operations can influence their financial entitlement.

Market conditions: Economic factors and industry trends may affect business value.

Goodwill and intangible assets: Personal vs. enterprise goodwill is often debated in divorce proceedings.

Tax implications: The sale or transfer of business ownership may trigger tax liabilities.

Common Challenges in Business Valuation for Divorce

Hidden assets or income: One spouse may attempt to undervalue the business or hide income.

Disputes over valuation method: Each spouse may prefer a method that benefits their financial interests.

Liquidity concerns: Even if a business has a high value, dividing it can be challenging if liquidity is low.

The Role of Business Valuation Experts

Appraisers will utilize the same methodologies they would for any valuation including the market, income and asset approaches. If the business is ongoing then it’s likely the first two will be relied upon, however, if the company owns a significant amount of equipment and real estate then the tangible assets should be valued as well.

Engaging a qualified business valuation expert, such as a certified valuation analyst (CVA), is essential for ensuring an objective and accurate assessment. Their expertise can help navigate complex financial issues and provide court-admissible reports. Determining a business's value in a divorce requires careful analysis and professional guidance. Whether negotiating a settlement or preparing for litigation, understanding valuation principles can help protect financial interests and facilitate a fair resolution.

Divorce can be a complex process, especially when one or both individuals involved own a small business. Accurately valuing these companies is crucial in dividing marital assets fairly and ensuring both parties receive equitable treatment. There are some important considerations for appraising a business during a divorce:

Engage with an Experienced, Credentialed Valuation Expert

Business valuation is a specialized field. Engaging a certified appraiser with experience in divorce cases ensures an unbiased and thorough assessment. Look for professionals with credentials like Accredited Senior Appraiser (ASA) or Certified Valuation Analyst (CVA).

Ensure the Company's Books are Current and In Order

It will be crucial that accurate financial records are available for the appraiser and that the most recent statements have been prepared. If they are lacking, work with an independent forensic accountant who can review your records and prepare current documents.

Valuation Methodologies

The appraiser will consider and rely upon different approaches to determine a business's worth:

• Income Approach: Examines the business's earning potential and cash flow.
• Market Approach: Compares the business to similar ones recently sold and factors in gross revenue and net income.
• Asset-Based Approach: Focuses on the company's net assets minus liabilities.

The choice of methods utilized will depend on several factors, including the industry and current operational state of the company.

Separate Marital from Non-Marital Assets

If the business was started prior to the marriage date or includes inherited or gifted assets, only the marital portion may be subject to division. Proper documentation and records are essential to differentiate these. Speak with an attorney familiar with the state laws to adjust for these issues.

Variables Driving Value

The appraiser will communicate with the business owner and gather specific data that will impact the business's value. Make sure that you provide full disclosure regarding topics such as revenue trends and profitability, how the market and industry affect your operation, whether there are ownership (buy/sell) agreements in place, and what discretionary adjustments should be made to the income and balance sheet.

In summary, disagreements over value will likely occur. Be prepared to negotiate or involve the court if necessary. Providing clear, well-supported valuation reports can help minimize conflicts. Dividing a business during divorce is rarely straightforward, but with the right approach and expert guidance, you can ensure a fair outcome. Transparency and accurate record-keeping are the biggest keys to creating a successful outcome.

We have worked with many clients and their attorneys over the years in support of ongoing litigation where the value of a small business and its underlying machinery & equipment is at issue with either a divorce case or an insurance claim. We have seen several situations drag out indefinitely at significant expense to the parties involved, ultimately leading to a court or arbitration hearing. The final judgment is ultimately left in the hands of a judge or arbiter who must pore through a significant amount of testimony and documents before rendering a final opinion that may or may not be favorable to those with a stake in the decision.

In rare instances, innovative ideas have been put forth by the opposing legal teams along with the judges or arbiters to create a more efficient and effective process toward settling on value issues as well as other components in a dispute. If both sides have engaged with independent valuation experts or other outside consultants who have no bias in the matter, they look to utilize them more directly and collaboratively during the pre-trial phase. The idea is for the experts to work together and come to a reasonable agreement on value, which avoids the need to carry these issues into the testimony component of the hearing or trial.

From our experience with this type of process, it has proven to be successful largely as long as the experts respect each other’s backgrounds and opinions while keeping an open mind when negotiating an agreed-upon value for their clients. The only times we have seen this alternative effort falter is when one of the independent consultants digs their heels in with only their specific interests in mind, irrespective of the other expert opinions, ultimately refusing to assist in the process reasonably.

There will always be cases where the parties are so far apart, and there are very high stakes involved that this process may not apply. However, many small business disputes involve disparities that are not that significant.

The big-picture goal of any professional consultant involved with a business or personal dispute is to be part of a team that aims to facilitate a fair settlement that hopefully works out for all parties involved. It’s improper for a professional accredited appraiser to focus their effort solely as an advocate for a particular side of the dispute. If they do, then their independence and unbiased opinions no longer apply. It’s fine if the valuation expert advocates for their work product and the conclusion of value they support. However, those opinions will always have a degree of subjectivity to them. It is incumbent on them to realize that different experts with varying experiences and points of view should be able to find common ground to help all parties involved with litigation dispute work.

Many of us know how difficult it is when you are going through a divorce, and as a business owner, the stakes are even higher. On top of the anguish and mental toll, a divorce can take on you personally, if you own a company or your soon-to-be ex-spouse owns one, and you need to consider this asset as part of the settlement, the first thing you will need to do is obtain a current valuation. This will provide a professional, unbiased assessment of value for the business so you have one less thing to try and negotiate a fair compromise on.

Your first reaction as a business owner might be reluctance toward opening your financial records to your attorney or your spouse and their attorney. That type of mindset could also bleed over to the appraiser, making it very difficult to properly complete the valuation. Consider taking the high road in this circumstance, which is always recommended when dealing with any type of messy situation that needs to eventually be resolved before the parties can move on.

It's ok to have disagreements on the value of your personal and business assets with other interested parties in any kind of situation, however, the only way to work through them to a reasonable end is through cooperation and full disclosure. Otherwise, the resolution process will take much longer without any guarantee that the outcome will be more favorable to you.

When it comes to working with outside third parties, such as an appraiser, the more information they have that is accurate and well-detailed, the more supportable and accurate the valuation will be. Also, consider the additional benefits of having a third-party valuation of your company completed. For example, you can rely on it as a basis of negotiations for future investment or financing purposes. Or down the road, you may want to sell the business or buy out a partner. It is much easier for a valuation professional to update the appraisal after having recently completed it, which will save you time and money going forward.

Having a long-term perspective when it comes to personal and business decisions usually pays off and provides additional unforeseen benefits down the line. Creating an efficient and effective plan now, even if it pertains to a divorce or other difficult situation, will allow you and the other parties involved to see the “light at the end of the tunnel”. This sense of optimism in the face of conflict will most likely result in the best possible outcome.

A business appraiser can work with you and assist in the valuation process, ultimately providing you with a detailed defendable report that you can work with to help resolve any type of dispute, including divorce. Be proactive in engaging with a certified professional so you have one less thing to worry about as you work through the settlement process.

As certified, professional business appraisers, we engage with quite a few clients and their attorneys who are going through a marriage dissolution/divorce and need to value a business owned by one or by both parties involved. The workflow process should not be much unlike any other type of valuation; however, the potential “drama” that often occurs during divorce proceedings can sometimes bleed into the ongoing communication.

If this happens, it is important to take a step back and reaffirm how the appraisal agreement is structured, and who your client is. As a rule of thumb, never allow yourself to be dragged into any disputes between the two parties that play out during your involvement with the case. Remember that you have been hired to act as an independent service provider who is there to facilitate part of the divorce settlement by providing an unbiased opinion. You have no personal or professional investment beyond this scope of work.

If your client is one of the ex-spouses and/or their attorney, all communications should be with these parties only. If representatives from the other side contact you looking for information, you should advise them that all comments or inquiries be made to your client directly, and kindly request they not to contact you further. Immediately notify your client of the situation and ask them to intervene and gain control over it.

Even if your client does not own the business, they are the ones who will need to obtain the necessary documentation required to complete the appraisal from the party that does. Even in rare cases where the divorce is amicable and both sides cooperate fully, you should ensure all communication and data come from your client only.

Another scenario would be a co-client agreement, where you now have to deal with both sides agreeing to the valuation, signing, and paying their share of the fee. This may be a court-mandated arrangement, and working through this process will likely be even more delicate. You will have to carefully manage communications with both parties and possibly their attornies without getting caught up in the residual emotions and disagreements.

You may want to avoid these types of engagements altogether given the amount of management they will likely require; however, if you do find yourself in this scenario, consider organizing a joint call or email with clear instructions on how you plan to handle the process flow. There is added responsibility on your part, and you will need to develop a streamlined way of getting the requisite information to complete the appraisal.

Either way, working through a business appraisal for divorce purposes will always have the potential of being a uniquely challenging project.

One of the more common requests we receive to complete a business valuation pertains to divorce cases. Whether it is for cooperative mediation or a more complex dispute involving litigation, independent appraisal work is often required when one or more of the parties owns a company that is deemed part of the shared property.

Any type of dispute, whether personal or professional, can be difficult to settle when differing opinions are held by each side. An independent professional appraiser can assist by taking an objective and unbiased view of the business and its underlying assets to estimate Fair Market Value.

The most important component from the valuation perspective is access to complete and accurate information. Without cooperation from all parties involved, the appraisal effort cannot move forward. It is imperative that the requested financial data and background summary of the business be disclosed in a timely manner to avoid delaying the process indefinitely. Once the valuation professional has all the necessary details behind the company, the appraisal can be finalized efficiently and effectively.

Even though the appraiser is typically engaged by one of the ex-spouses involved in the divorce, they have an ethical obligation to not take sides, and their work product is meant to be a tool to facilitate the decision-making required by the judges and arbitrators involved with the overall mediation. There are a number of other issues at stake in a divorce case, and the appraisal may be just one of these; however, differing opinions of value are quite often material in nature and can have a significant impact on the final result.

No one truly wants a divorce to drag out all the way to trial, including the independent experts assisting in the matter. As difficult as the situation may seem for those directly involved in divorces and related disputes, the only way to move towards a conclusion is to assist in the processes required to fairly disclose and measure the value of the assets. Speak with a certified professional appraiser with experience in these matters to learn more.

Most everyone is familiar with the commonly cited statistic that 50% of all marriages end in divorce. Unfortunately, this estimate is essentially factual, with around 40% of first marriages and 60-70% of second and third marriages making up that average figure. Experts will also tell you that the last three years of hardships (we all know which ones I am referring to) have driven these numbers up further and will continue to rise in 2023.

If one or both of the partners in a divorce owns all or part of a business, the value of the enterprise and its underlying assets will likely become subject to the overall divorce settlement. A dispute as to the assessment of the fair market value of the business is commonly a factor in many divorce cases. The best way to resolve any dispute, ideally in an amicable fashion, is to engage with a certified business appraiser, who can provide an independent value based on reviewing the company history, analyzing financial data, researching the market, and understanding the assets associated with the operation.

Divorce attorneys will often be the representatives who suggest this approach during the proceedings and will work directly with the appraiser to facilitate the collection of data from either or both parties involved. This process can get bogged down for any number of reasons, and the judge or arbitration representatives involved should look to expedite the process with the legal means available to compel the availability of the information needed for the appraiser to complete the appraisal.

Without cooperation on both sides to work through the valuation issues together, the roadblocks to settling these cases can pile up, andthe divorce terms may ultimately be decided by the courts, who have no personal stake in the business or the overall case. The courts will look to rely on any experts involved in assessing value and if both parties engage separate appraisers, it could lead to deposition or trial testimony to ultimately determine value.

It's logical to assume it would be ideal for both parties if these decisions were made amicably and mutually however, the reality is that many divorce settlements become very difficult to settle due to significant differences of opinion, making the ability to work through the process unattainable without the assistance of independent third parties. When it comes to maximizing your chances of arriving at a fair settlement of business value involved in a divorce, seek out an unbiased experienced appraiser to work through the issues with you.

When you are considering a "divorce" from a partner, it can be very messy trying to figure out an equitable solution to dealing with your business, especially in community property states. Both sides want to benefit from the deal, and it can be hard to find a solution that everyone can live with, especially when one or both of the spouses want to continue working in the business and the parties are not willing to work amicably towards an agreement. But a divorce business valuation can provide a quality valuation of a company that uses standard practices by a qualified, impartial appraiser to determine a fair value and a fair deal for all concerned. Here's how getting a company valuation works in a divorce works and the specifics of which valuation methods are used in this situation.

Using a Business Valuation to Get a Fair Deal in a Partnership Divorce

• It's important that you get your valuation of a company through a qualified, certified business valuation appraiser. Because a professional appraiser has gone through the training and nows the appropriate standards to use in your situation, doing so will help you avoid spending money on an appraisal from an untrained person that may not hold up.

• One method often used in business valuation is the market approach when looking at comparable businesses. By taking into account different business attributes and investment risks, it's possible to develop a comprehensive valuation that is fair and equitable to all sides in the business.

• Though it's common in non-adversarial situations to use a comparable transaction method under the market approach, the most common data source only go back a single year, but doesn't address prior years. Because a seller in non-adversarial situations is often actively trying to paint a good picture of the business income to get the most out of the sale, this approach doesn't work well in a partnership divorce business valuation.

• When a qualified business valuation appraiser is used, it's easier to find an equitable solution to the problem. This is especially important in situations where there are allegations that one party has not been running the business honestly. Because a qualified valuation specialist can study the figures that play into the business' final valuation, it's easier to locate potential problems or mis-reported figures.

Though partnership divorces are, by nature, painful and emotional, coming to a fair and equitable valuation for your business doesn't have to be.