As indicated in prior blog postings, one of the major topics in a Colorado
divorce case can be the division of marital property. Property can come
in all shapes and sizes, and is not limited to cars, houses, and retirement
accounts. Every so often, a divorce case will come along in which one,
or both parties, owns a business. Just like any other piece of property,
that business may have a marital component to it, and a cognizable value.
One of the first things that comes out of most people’s mouths when
discussing a business with the Denver divorce attorneys at Plog &
Stein is the notion that the value of a business is essentially calculated
by looking at assets minus liabilities, and nothing more. The other thing
that seemingly comes out of most people’s mouths is the idea that
only a business with inventory or significant property, such as a car
dealership or a store, has any real value. Both common notions are wrong
when it comes to property division in a divorce.
There are many types of businesses one might have, or fight over. We have
seen people with liquor stores, restaurants, car dealerships, medical
practices, legal practices, and more. A business does not have to have
inventory and property to have value. A business does not have to sell
something. A single attorney or accountant sitting alone is an office
can constitute a business with marital value. Service industry businesses
are businesses, too.
Once your divorce attorney determines the existence of a business, you
will need to have discussions regarding figuring out the marital components
to the business. The business may have been owned prior to marriage. If
so, as with other property, there must be a determination as to whether
there has been an increase in value during the marriage, to be divided
as part of the
property division. There may also be partners or other shareholders, whom will also need
to be factored in. Once it is determined that there is likely a marital
componenet, the next step will be figuring out a value. The way this is
normally done is through the hiring of a business valuator.
A business valuator will generally be a CPA, with specific training in
valuing businesses. Beyond looking at the balance sheet of assets and
liabilities, the valuator will also need to receive various documents
from the business or opertating party to determine a proper present value.
Beyond the balance sheet, the signficant issue will be revenue and income
generated by the business. The documents that will be important to the
valuator will be those related to earnings, such as bank statements and
tax returns. With these items, the valuator will look at historical income
flow, trends regarding increasing or decreasing revenue, as well as trends
in the industry as a whole. Again, the key will be determining a present
value of the business. Though the income of a business is not the “value,”
it can be used to determine present value. We have all likely heard the
term “good will.” Rather than being some ephemeral term, good
will is actually a quantifiable figure which can be set forth in dollars
related to value. There may be no assets or liabilities, yet a business
can still have a cognizable value to it based on income flow and good
will. It can also have value based on income flow alone.
In Colorado, there are various accepted methods for business valuation.
Some can include the “capitalization of earnings method,”
the “summation of assets valuation method,” the “multiple
of price to revenue method,” or the “multiple of seller’s
discretionary earnings method.” Often, a valuator will employ multiple
methods to arrive at a fair present market value. Attorneys are attorneys,
not business valuators. The valuator should be adept at applying multiple
approaches to a valuation and will know the ins and outs of valuation
that are beyond the technical grasp or comprehension of your divorce attorney,
from an actual calculation standpoint. At the same time, your attorney
should be able to go through the valuation methods with your valuator
in court, with a basic understanding of how the employed methods work
and how the valuator arrived at his or her conclusions.
Business valuators are experts, in a real world and witness sense. When
seeking a business valuator, your attorney will likely turn to someone
known to him or her, and known in the family law community as someone
who is reputable, learned, and good at both writing and testifying. Often
times, parties will jointly choose a valuator, with both knowing that
a rebuttal expert can be obtained should there be disagreement as to the
conclusions of the initial valuation.
As with most experts, business valuations cost money, which will generally
need to be paid up front. Most valuators are going to want somewhere between
$3000 to $5000 to value a smaller business. The bigger the business, the
bigger the complexities, the bigger the cost. I once saw a very reputable
valuator assess a small, mom-and-pop liquor store for $800. That was an
exception, not the rule.
Divorce courts can certainly allocate the cost of a valuation among the parties
as they see fit. Courts can also order that a valuation occur, over the
objection of one of the parties.
Once a value is determined, and the marital portion is ascertained, the
next step will be figuring out how to divide the equity in the business.
If one party intends on keeping the business, which will likely be the
case, and particularly if it is pre-marital, it will need to be determined
whether there will be a lump sum payout, a payment plan, the issuance
of shares of stock to the other party, or the offsetting of other marital
property. If the parties cannot agree, the courts will certainly decide.
The other option is to sell the business and split the proceeds appropriately.
A court can certainly order sale, but will likely not do so if the business
is a viable concern and there is a viable plan for paying the other party.
I often hear business owners or operators say, “it’s not worth
anything.” Conversely, I often see the other party with dollar signs
in his or her eyes. Your attorney cannot value your busines. Your attorney
can assist you in assessing whether a valuation is needed, finding a good
valuator, and settling or litigating the issue once the valuation is done.
Sadly, in this economy, most businesses are not generating the income
they were a few years go. That does not mean that there is not a marital
property component to be looked at. You now know the basics of dealing
with a busines in a divorce. You can choose to fight or settle any disputes
over a business, but do so armed with the knowledge that it may be divisible
property and the knowledge that it may be worth more, or less, than you
might have thought.