Business Valuations in Divorce

By by Martin M. Shenkman, CPA, MBA, JD

Divorce is quite common. About 50% of all marriages end in divorce. When a couple does decide to divorce, they usually must deal with the division of assets.  Often this includes an interest in a closely held business. The business must be valued in order to see how much each spouse is entitled to.

  • How much each spouse receives depends on a myriad of factors: how much the work the spouse who is part of the business down, the contributions of both, husband and wife, to the company, if the company was started during marriage or before, etc.  Rulings vary immensely from stat to state
  • You really need to hire a skilled business appraiser and a forensic accountant. The business appraiser may be excellent at determining the value of business but the forensic accountant is vital because he can see what type of changes were made to decrease the value of the business, in order to prevent the other spouse from receiving a lot  of money. Alternatively, the forensic accountant can prove that all business dealings were handled honestly, and this will prevent much fighting and legal fees.
  • One step in valuation process is to determine, identify, and value the assets of the business that ultimately contribute to the total value of the business. This is difficult because many businesses do not keep standard balance files, and accountants usually have to rely on income tax returns. However, in terms of taxes it makes sense to make as many deductions as possible. Therefore, the tax returns may not mention many assets, causing the business to appear less valuable.
  • Things to analyze for the valuation process are:
    • Expense repair and improvement policy of company a rental house. Did the company deduct significant repairs that, when looked at all together, would really be considered improvements to the business in terms of value?  This all needs to be analyzed, because the business maybe worth more, entitling you to more money.
    • Related party transactions, for example, your ex-spouse’s brother’s business.  What is being paid to that business, and what arrangements were made with that business, which were not recorded?

 

 

The above is a summary of a seminar given by Martin Shenkman of Martin M. Shenkman P.C. For more free information of Trust and Estate Law, visit his website at www.laweasy.com.