When there are substantial assets or business interests subject to division in a divorce proceeding, both spouses agree on the value of the assets (or a judge needs to make the decision) before they can be divided. This is assuming, of course, that you and your spouse have been unable to reach an agreement otherwise.
Asset and business valuations typically require assistance from a variety of professionals, including business appraisers, financial analysts, brokers, and accountants. One thing you’ll quickly discover is that even reasonable minds can disagree about the value of certain assets and business interests. The more illiquid or otherwise unique the asset or business interest is, the more subjective the valuation process becomes.
Just because your qualified experts have all come up with a different value for the community assets and business interests, which also differ from the value your spouse’s experts came up with, doesn’t mean anyone made a mistake. In fact, this range of values can help both parties make a more informed agreement when dividing community property. However, there are several common mistakes made during the valuation process of which you should be aware.
1. Using the wrong valuation method. Often, fair market value and discounted future earnings are not appropriate methods to calculate the value of a business interest in divorce. First, privately held companies are usually illiquid (or may even have a clause preventing the sale of any business interest to an outside third party), and the fair market value does not take into account this discount. Second, discounted future earnings are usually never appropriate because community property can only be acquired during the course of the marriage, and cannot result from either spouse’s post-separation efforts.
2. Failure to include all the assets and liabilities of the business. It’s important to be sure that you and your experts are considering all the assets and liabilities of the business. It sounds simple, but many significant assets and liabilities often go overlooked in a divorce. For example, the parties may focus their attention on the value of the business’ goodwill (which is a rather complicated and speculative calculation), and fail to include cash on hand, office equipment, or accounts payable in the final calculation.
3. Failure to adjust for unique events and risks. It’s easy for your spouse to want to take last year’s record earnings and use that to arrive at the value of the business. However, the expert appraisers need to be aware of unique events that need to be adjusted for in the business valuation model. For example, your business may have been awarded a one-time contract for a big event that isn’t likely to ever happen again. Likewise, there is more risk involved in running certain types of businesses that need to be accounted for.
The bottom line is that when you are valuing assets or business interests in a divorce, all parties involved take into account all of the factors affecting the value of these items. The end numbers will often differ but should be calculated with all the relevant facts in mind.
If you have any questions about valuing assets or business interests in a divorce, seek out a consultation with a family law professional in your area.