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What to expect with a business valuation amid divorce

On Behalf of | Dec 13, 2022 | Divorce, Property division

If you or your partner own a business and are facing a divorce in Orange County, things can get sticky pretty quickly when it comes time to divide assets, whether in a high net worth divorce or a more traditional divorce.

Even if the business does not have a significant value, the value does need to be addressed. The only one who is qualified to render an opinion of the value in a divorce is a forensic accountant. Orange county divorce lawyers are not trained or qualified to render such opinions.

If you settle the issues in your Orange County divorce, how do you know what value to place on the value without an expert even if your divorce is not a high net worth divorce. If you have to try your case in an Orange County family law courtroom, the court will expect you to present evidence of the value of the business through the testimony of a forensic accountant.

A business valuation is most likely necessary unless the non-operating spouse simply wants to walk away from the value of the business without offset assets. Here are some things to be aware of as you venture into this new territory.

Who handles valuation?

Aside from relying on yourself or your spouse to provide accurate valuation data, which is not recommended, there are a couple of approaches that you may take to determine the business’s value. The least contentious method of valuation may be to jointly hire a third-party forensic accountant who can provide you with a valuation. However, jointly retaining an expert involves a number of potential problems. Using a joint expert may be the right solution but many issues need to be carefully reviewed with an Orange County family law attorney. One of the problems that may exist is to determine what the relationship is between the other lawyer and the expert selected. Many times the non-operating spouse wants and needs to have an independent expert to feel like his or her rights are being properly advanced. Often, Orange County divorce lawyers cannot agree on an expert to be jointly retained. Another option is for both you and your spouse  to individually hire a forensic accountant to dig deeper and then share the results with each other and your legal team.

What affects valuation?

There are many factors that affect how your business appraises the value.

Location

The business location is a significant factor that a forensic accountant will look at when assigning a value. An excellent location will contribute to a higher valuation, just as a poor location will lead to lower worth.

Potential for future growth

If the business’s income has a positive trend of growth, the business valuation will also be higher. Likewise, a downward trend that shows a contraction of income will lead to a lower business valuation.

Diversity of products and client mix

Valuation is also typically correlated with the number of clients the business serves. Having more customers may add more value to the business, assuming they are profitable customers. Similarly, diversity among your products and target markets may increase the business’s value.

Income

In the final analysis, generally, the value of a business is tied to the income it generates. The point of owning a business is the income it earns. If there are little or no earnings there by no reason to own the business and the value may be negligible. The income is generally viewed as a combination of the salary paid to the owner-operator spouse, distributions made by the business over and above the salary paid to the owner-operator and any perks paid to the owner-operator spouse. These items together are the total cashflow being generated by the business.

A related issue is the amount of time that the owner-operator spouse spends working in the business. A business that runs itself while the owner-operator fishes and golfs is generally worth more that a business that requires the owner-operator to be a 24/7 manager.

Goodwill

The value of a business is a combination of the adjusted book value and the goodwill. Although accountant do disagree as to the value of the adjusted book value, generally the main area of conflict is in the valuation of goodwill. The forensic accountant has wide discretion in how he values goodwill. The valuation is believed by many to be more of an art than a science.

Tax considerations

One of the main objections to how a business is valued in Orange County family divorces is the way in which tax is treated. The owner-operator spouse must pay the other spouse fifty percent (50%) of the value of the business on an after-tax basis. In other words, if the business is valued at $600,000, the owner-operator spouse must pay the other spouse a non-taxable sum of $300,000.

Summary

Knowing what to expect in a business valuation can help remove some of the unknowns you may face when moving through a higher-asset divorce and can help you be a better partner with your lawyer and forensic accountant during the valuation process.