Divorce is a complex process. One of the most difficult parts can be valuing a business. Whether it is a family ran car dealership, a closely held hedge fund, or shares of a larger corporation, the value of the asset or interest can have a tremendous impact on the division of the marital estate. But how do parties, attorneys, and judges determine value of the asset or interest?
Why Business Valuation is Important in a Divorce
When a couple owns a business — whether it’s a small enterprise or a larger company — it can represent one of their most significant assets. Business owners have an interest in valuing the asset at the lowest possible number, while the non-owning spouse has an interest in valuing the asset at the highest possible number. Many clients are surprised to learn that the non-owning spouse has a “marital interest” in the business that must be valued at the time of the Initial Case Management Conference. Minnesota case law has held that valuing a business is “an art, not a science.” Not surprisingly, valuing a business for purposes of a divorce, can be complicated and create a significant amount of litigation.
Methods for Business Valuation
In Minnesota, there is no universal formula in determining the value of a business, and a judicial officer is required to consider all factors including, but not limited to, the following eight:
- The nature of the business and the history of the enterprise from its inception;
- The economic outlook in general and the condition and outlook of the specific industry in particular;
- The book value of the stock and the financial condition of the business;
- The earning capacity of the company;
- The dividend-paying capacity;
- Whether or not the enterprise has goodwill or other intangible value;
- Sales of the stock and the size of the block of the stock to be valued; and
- The market price of stocks of corporations engaged in the same or a similar line of business having their stocks traded in a free and open market.
Each of the above factors can have an impact on the marital value of the business, but in order to determine how the factors impact the value, an expert will utilize one or more of the following methods:
- Asset-based approach: this method involves calculating the net asset value of the business by subtracting liabilities from assets. It’s often used for businesses that have significant tangible assets or assets that can be liquidated.
- Income-based approach: this approach values a business based on its ability to generate future income. It is suitable for businesses that are expected to continue operating and generating revenue.
- Market-based approach: this method determines value by comparing the business to similar businesses that have been sold recently. It’s most effective when there is a robust market for comparable sales.
Even within these approaches, appraisers can use different sub-methods such as prior transactions, capitalization of earnings, and guideline company transactions to calculate different values. This can create a significant difference in value and impact the parties’ marital estate.
Engaging a Professional
Given the intricacies of valuing a business in a divorce, it is essential to hire a qualified business appraiser or valuation expert. Couples going through a divorce can retain their own experts, hire a neutral expert, or even hire their own experts to critique a neutral report. These valuations are essential for negotiating a final settlement or proceeding to trial. If a party does not know the potential value of a business, they could be losing or overvaluing a significant part of the marital estate.
Negotiating and Dividing
Once a valuation has been completed, the divorcing couple must decide how to divide the business interest. Options include:
- One spouse buys out the other’s interest: this is common when one party wishes to retain ownership;
- Co-Ownership: rare but possible if both parties are willing to maintain a professional relationship; or
- Selling the business: the proceeds can be divided equitably.
Negotiating both the value of the business, and potentially the allocation of the interest, can be accomplished through direct negotiation or with the help of a mediator. However, if parties are unable to reach an agreement, a judge will make the final decision. It is essential to have a detailed business valuation prepared for trial, and an attorney who understand how to convey complicated financial formulas to a judge. The attorneys at Hellmuth & Johnson have the trial experience to negotiate a resolution that is in the client’s best interests, or aggressively advocate for their client’s position at trial.
