The valuation of a business or professional practice is a critical aspect in many divorce cases and requires a well-supported professional appraisal that is defendable in court. Valuation is generally highly subjective by nature even when approved methodologies are correctly applied. A basic knowledge of those methodologies is crucial to competent representation of the business owner or spouse in a divorce.
More small businesses and practices are sold on the basis of a tangible asset sale. However, in such situations where a brand name, strong reputation, or well-established client base exists, these intangible assets should definitely be included in the valuation. In most cases, the value of a business is determined by "fair market value." Fair market value is the amount at which a business would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Factors that are traditionally considered in arriving at fair market value include the nature of the business, the economic outlook of the business itself and the outlook of the particular industry, and the financial condition and earning capacity of the business.
Various professional practices are considered marital property, and subject to equitable distribution. Even if the ownership interest is in the name of only one spouse, the business may be marital if it was established/acquired, improved upon, or financed during the marriage. Often only one marriage partner is employed by the business. That partner may have a tendency to underestimate the value of the business for the divorce process. Trying to save on the cost of an independent appraisal may end up costing a significant amount more for the other party. For this reason, especially during a contentious divorce, business appraisals are essential in divorce proceedings.
The most common situation related to an understating of income, assets and the related value of a business occurs when a spouse controls a closely held business. Following is a list of potential fraud areas that should be considered:
There is an upward trend in divorce cases in which business owners hire a business appraiser jointly. Determining the value of a business is among the most controversial and time-consuming events in a divorce. Using a jointly retained appraiser takes less time and reduces conflict. By signing a detailed engagement letter issued by the appraiser, both parties agree on the key factors in advance. However, there are situations where a jointly retained appraiser should not be used. In these situations one of the parties is determined to take an extreme position or agrees to sign on reluctantly. Since the value derived from a joint appraisal can be contested, if this happens, it may set both parties back to square one, leading to hiring separate appraisers and fighting it out in court.
It is important to understand and appreciate that valuation for divorce is unique, especially regarding professional practices. The appraiser should have the training experience and credentials, and produce a written report, which details the analysis and steps taken to reach a value conclusion.
