Kevin J. Waite, P.C. | Attorney Blogs

Business Valuation in Divorce

North Idaho Attorney Kevin J. Waite, P.C. on Friday, January 4, 2019

In many divorces the most significant asset to be divided is the marital residence. As stressful and complex as that can be, the division of a business is usually much more complicated.

The same issues are likely to be present. Is the business one party's separate property or is it community property? If separate property, is there a community interest? What is the value of the business? What debts encumber or go with the business and effectively reduce its net equity?

Valuation of a business is more complicated than valuation of real property. It usually requires engaging an accountant who has special expertise and credentials in valuation to review and analyze tax returns and other business records. This valuation expert usually generates a report setting forth what he or she has reviewed and considered, an opinion as to value and the reasons supporting that opinion. Obviously, this is expensive.

Often the owner or owners actively work and manage the business. An owner-manager's compensation may be more or less than what a hired professional manager would be paid to do the same job, further complicating the valuation process.

In the end, the most accurate value of an asset - whether a business or a home - is what an arms-length purchaser would pay for it. A valuation, which is just a glorified name for an appraisal, is a substitute when for whatever reason the asset is not going to be sold. As such, any valuation is potentially subject to criticism as to its methodology, analysis and conclusion. As with other areas of litigation, a battle of the experts can and sometimes does occur.

Sometimes, in an effort to avoid that scenario, and to share the expense, the parties agree to hire the same valuation expert. They may also agree to be bound by the expert's conclusion. Alternatively, they may reserve the right to disagree with the jointly retained expert's opinion, and in effect obtain a second opinion at that party's expense.

Whether to seek a valuation of any business that is caught up in a divorce is essentially a cost-benefit analysis. That analysis needs to be done by attorney and client together. As indicated, sometimes the other side leaves no choice and a valuation must be obtained.

This blog is not intended as legal advice, and an attorney and/or valuation expert should be consulted about any specific situation.