The divorce process can be legally and emotionally complicated enough; add a family-owned or privately-held business into the mix and it becomes even more complex. Determining how to assign a fair market value to a business and how to divide that value between the divorcing spouses so that each gets their rightful share is a task professionals spend their entire careers learning to do well.
In a divorce, all assets and income, including income from a business, must be properly evaluated to determine critical financial issues, from spousal and child support to property division. Getting a business valuation right can secure a future for the non-working spouse, as well as achieve a successful and efficient result for the spouse who owns the business. Getting it wrong can result in one spouse getting a fraction of what would be fair and the other spouse getting a potential windfall.
Over the years, with the help of other professionals, I learned how to read and understand financial documents and business valuations so I could secure fair and equitable results for my high-net-worth clients. Here are the crucial steps every divorcing spouse should take when a business is owned by one or both spouses to secure the best outcome.
Ensure Your Attorney Understands Business Valuation
When a divorce involves ownership of a business, the spouses usually hire outside experts to ascertain the business’s value. These can include CPAs and other professional business evaluators. They typically calculate a business’s fair market value by investigating its assets, liabilities, cash flow, future income potential and more.
If a valuation expert is making unreasonable assumptions or conclusions about the business’s value, the divorce attorney is often the last line of defense. As such, the attorney needs to truly understand how business valuations work and be knowledgeable enough to challenge a valuator’s conclusions that potentially miss the mark before the valuation alters the outcome unfavorably for one or both of the spouses.
Early in my career, I made it a point to become as well-versed in business valuation terminology and methodology as I was in matrimonial law. This has enabled me to catch problematic valuations before they had a chance to damage my clients’ cases and, in turn, their futures.
Unfortunately, many attorneys rely heavily on the experts to reach the right conclusions and are not sufficiently versed in the valuation process to spot unreasonable assumptions and methods. This can be damaging in two ways.
If the business-owning spouse’s valuation expert determines the business is worth significantly less than it actually is and the non-business-owning spouse’s attorney doesn’t know enough to challenge it, then the non-owning spouse’s overall financial settlement is likely to be less than it should be.
Conversely, if the non-business-owning spouse claims an unreasonably high value of the other spouse’s business, this can result in a loss of credibility with opposing attorneys and the judge, not only undermining the non-owning spouse from getting a fair valuation of the business, but also undermining the spouse’s other, legitimate claims in the divorce proceeding.
To best serve our clients, it is imperative for a divorce attorney to vet an expert’s conclusions for accuracy, consistency and reasonableness. The attorney needs to be able to ask the expert hard questions about the methods they used to arrive at their conclusions as to the business’s value. When the expert is able to back up their opinions with clear, well-supported answers, that establishes their credibility in the eyes of opposing counsel and the judge and makes the client and the client’s attorney look more credible as well.
Avoid Conflicts of Interest: Hire Your Own Valuator
Another pitfall in business valuations in divorce is both parties using one valuation expert, which can result in potential conflicts of interest.
For instance, some valuators see their role as reaching whatever value opinion makes their client happy, especially if they are hired by the business-owning spouse. Experts are human and not always as objective as they should be. The same applies to couples going through mediation who try to save money by choosing one joint valuator. In those cases, it can be challenging for the expert to balance each spouse’s interests and come to an impartial determination of the business’s value.
Ultimately, the wisest course is often for each spouse to hire their own valuation expert to avoid conflicts of interest and the risk of an unreasonable or inaccurate valuation. I frequently advise my clients who are non-earning spouses to retain their own independent expert valuation. Getting two opposed valuations of the marital business interest makes it possible to compare the valuations and discover areas that aren’t in line with reality or fairness.
With Property Settlements, Think Short and Long Term
As attorneys, it is our job to educate spouses on the basics of valuation and why it is so important. It’s also our responsibility to protect their short-term and long-term security.
Most importantly, if you accept your spouse’s claims when negotiating an equitable settlement, you will not get a second bite at the apple should you later discover your ex-spouse provided inaccurate or falsified information about their business.
Property divisions in divorce are generally permanent. This is both a blessing and a curse. It is good because once you are awarded property in a divorce, it is very unlikely you will ever have to give it back for any reason; disputes over ownership of business interests are resolved for good. By the same token, however, if you did not receive everything you were entitled to when the divorce was finalized, it is very unlikely you will get anything more in the future. In other words, with property and divorce there are no re-dos: you get only one chance to get it right.
The question then becomes: How can you know whether your divorce attorney is sufficiently knowledgeable at business valuations to protect you from incorrect or overreaching experts? It is important to ask your attorney the following questions:
- Has the attorney previously participated in cases that involved high-value businesses?
- What steps have they taken to learn valuation methods and best practices?
- What procedures do they use to review an expert’s opinions and conclusions and to evaluate for reasonability and accuracy?
People hire me and my partners at Berger Schatz because of our reputation for expertise in business valuations. They know if they hire us, they’re going to get the best possible result and are not going to be taken advantage of.
The old saying “trust but verify” holds true here: Even if you believe your spouse will not try to gain an unfair advantage, and even if that happens to be true, it is always possible for a valuation to be disadvantageous to you. It is important to have a knowledgeable and seasoned legal team on your side to prevent a business valuation from negatively affecting the outcome of your divorce.