Divorce is never a good thing, but it can be an especially challenging experience if there is a business involved.
When a marriage ends, the spouses need to divide their marital property, including businesses that were started during the lifetime of the marriage.
As is often the case outside of a divorce, business owners and their spouses are not certain of the value of their business. Yet, in most marital dissolutions (i.e., divorce) a value must be assigned, as the business is frequently considered a marital asset that needs to be valued and divided between the parties at settlement.
In this article I put forth some pearls of wisdom that I have incurred by providing business valuation services on over 100 divorce cases.
Valuation of Your Company
When you are going through, or contemplating divorce, do you even need a valuation of your company?
For the sake of simplicity, I am going to stick to businesses that are “marital,” meaning they were started during the life of the marriage (at times non-marital businesses, or businesses that were not started during the life of the marriage, are valued for purposes of consideration for asset division at settlement). Also, for simplicity purposes, I am going to assume that the business in question is going to be owned 100% by one of the spouses post-settlement.
Whether you are living in an “equitable distribution” state or a “community” state, you will be asked to disclose the ownership of an asset (and liability) and assign a value (or lack thereof) on a legal filing of which the party swears the authenticity of the information presented.
As is often the case, business owners do not know the value of their company. So, what do they do when they need to put down a value of the entity? Often, the business is valued at a guesstimated number or, perhaps, a number the party wants it to be worth. If one party disputes the value, then the ball is rolling toward obtaining a valuation (if one had not already been requested/obtained). I would, of course, suggest that a fair market value is always used in the consideration of the division of marital assets, but the truth is, if the parties agree that the business is worth $X and divide the asset in accordance to this agreed-upon value, then that value is perfectly fine to use, and life goes on. Unfortunately, this often is not the case.
Save Time and Money
Do you want to save time and money? Use a neutral business valuation expert when possible.
For the first two years after starting my company, I worked almost exclusively in business valuations for marital dissolution purposes. On the one hand, I found the work fascinating, yet on the other hand, I found it frustrating.
Here is a typical divorce valuation scenario: The nonoperating spouse hires a business valuation expert who finds the business to be worth $10,000,000 (hypothetically speaking), and the operating spouse hires an expert who finds the business to be worth $10,000 (an exaggeration, but you get the point). In my field, this is not allowed, yet I find that experts do this all the time. The standards and regulations of business valuation experts demand that a valuation expert is always impartial and objective. If the expert is anything other, he/she is at risk of losing hard-earned certifications and/or personal goodwill. Reputation is everything in my field.
I found this contrast in the valuation world to be both fascinating and frustrating.I often work as a neutral. Working as a neutral means, to the best of my ability, I work equally with both parties. Often, I find that one party wants to be more involved than the other. This is fine, but my job as a neutral is to ensure that I have alerted both sides to where I am at in the process and make myself equally available. I find the “battle of the experts” unnecessarily wastes money and time, and more than not, at settlement the value determined to be divided is similar to what it would be if a neutral expert had been used.
Be Transparent and Honest
Even when I work as a neutral, I encounter business owners who hide monies received and inflate costs and/or expenses.On the flip side, at times nonoperating spouses “add” sales and reduce costs and/or expenses. Emotions are high. People are often not thinking clearly, and often the finger pointing isn’t even about the money.
I’ve worked on enough valuations to see the tricks of the game early on. I recently valued a cleaning company for a divorce where the nonoperating spouse claimed that the operating spouse was not recording cash received for services provided. The amount of cash claimed to be received, but not recorded, was relatively large to the overall size of the business. In situations like these, there are several things that can be done to “trace the cash.” In this instance, similar company financial data was reviewed, and it was clear to see that the amount spent on costs and expenses in the subject company did not align with comparable companies. Upon discussion with the operating spouse, she admitted that she overlooked cash sales, which were then added into the consideration for the fair market value.
Often, these games, or unintentional omissions, only lead to added money for expert services and time wasted, prolonging the process and creating unnecessary angst.
Division of the Business Shareholding
In 99.9% of the divorce valuation cases that I have worked on, the couple chooses to go their separate ways post-divorce, with respect to their involvement in the business; one often remains active in the day-to-day operations and one will not. If the spouses have a control ownership, then theoretically both parties could continue to work in the business (assuming that they are not held to any binding shareholder restrictions). I have not personally worked on a case in which both parties continued to work together, although I have researched some, and unsurprisingly, challenges
Of course, if the shareholder is a minority shareholder, then transfer of the ownership to another individual is often not allowed and/or accepted by the other shareholders. The operating agreement, if the company has one, should detail out transferability restrictions and allowances.
Most divorce cases settle, and as previously noted, the settlement can be decided by the parties to their personal satisfaction. If the case goes to court because the division of the marital company asset is disputed, the party often discusses a myriad of legal possibilities with their counsel. If the matter is resolved in court, it is in the judge’s hands and not the parties involved.
Make the Ride as Painless as Possible
I have not forgotten about the fact that someone is still trying to run the business as this emotional roller coaster ensues. My advice is to work with an expert who obviously knows their area of expertise, but also one that you feel can get you through the process predominately unscathed.
You may be still running a business and trying to keep it alive and well, raising children, dealing with the end of a friendship/love, or all of the above and more. And often on top of it, people you barely know, and who you are paying good money to, are asking you many questions and making a lot of requests. It is imperative that you work with professionals who do their job in a way that makes your “job” in the process as painless as possible.
I often suggest that people going through a divorce meet with more than one expert in each field of expertise (attorney, forensic accountant, financial advisor, business valuation analyst, etc.), to ensure that the person that they hire knows their field of expertise, and that their personality is one that you can work with in a potentially stressful setting for a set amount of time (I’ve found most divorces with businesses in consideration take about a year on average to settle).
The process is more often than not long and arduous. If an expert is doing their job right, at times they may not be liked, but in the end, hopefully they will be appreciated for their honesty and hard work.You will get there, and your business does not have to suffer along the way. Follow these pearls of wisdom to make the experience less difficult.