What to Know If You Own a Business and are Contemplating Divorce
After the holidays, many people make New Year’s resolutions to lose weight, eat better, save money and spend more time with family. Some, however, make a resolution to make this the year to get divorced. According to the American Academy of Matrimonial Lawyers, divorce filings in January are usually one-third higher than in other months.
Already emotionally draining, divorce also can be difficult financially as family assets are split between husband and wife. These generally include real estate, automobiles, cash, retirement accounts, pensions and privately held business interests.
Many assets have values that are relatively easy to obtain by looking out on the open market. Other assets, primarily privately held business interests, are often the largest and most difficult assets to value. Below are some important concepts to keep in mind if you have a privately held business interest and anticipate a divorce in 2016.
Fair market value
When going through a divorce in Missouri, all business interests must be valued using the “fair market value” standard of value. Fair market value is defined by the Internal Revenue Service Revenue Ruling 59-60 as “the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell; both parties having reasonable knowledge of relevant facts.” Fair market value is not the value a company might actually sell for to a synergistic buyer, but rather, the price that would be paid by a single investor on the open market. It doesn’t contain any added value from a combination and often factors in a discount for lack of control (for minority interests) and a discount for lack of marketability.
Separate vs. marital assets
Even if your business was owned prior to the date of marriage, and is considered by the court to be a separate asset, you may still need to have it appraised. People often think that because the business was owned by one party before marriage, its value is irrelevant. However, if it’s a large business that makes up a significant percentage of the couple’s overall asset base, the court may still want to know what the company is worth when determining how to distribute the rest of the couple’s assets. The Brown Smith Wallace Transaction Advisory and Litigation Support team recently performed two valuations for a couple that had two business interests: one separate and one marital. Having a value for both companies helped the couple settle the case and spared them additional attorneys’ and accountants’ fees.
An independent appraiser
All business valuations must consider three generally accepted approaches — an asset approach, an income approach and a market approach. It is up to the independent appraiser or valuation analyst to determine if a single method or a combination of the three methods should be relied upon.
Business valuations are complex engagements that require the services of a qualified independent appraiser to determine the fair market value of the interest. When determining who can help you determine the value of your or your spouse’s business interest, be on the lookout for someone who is a Certified Valuation Analyst (CVA), Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), and/or a Certified Business Appraiser (CBA). These individuals are well versed in business valuation theory and have undergone the requisite training required to give you sound opinions of value.
If you're contemplating divorce in 2016 and have a privately held business interest, click here to schedule a meeting on business valuation considerations.
If you're a family law attorney, click here to register for our February 23rd Brown Smith Wallace divorce seminar to learn about what drives business value and current trends in the market.