Valuing the Business

When a couple gets divorced, typically, counsel for both spouses will hire an expert to value the business, and more often than not, the experts’ values are miles apart – sometimes to the tune of millions of dollars.

Getting a credible and supportable appraisal of the business is one of the most critical steps a divorcing business owner should take to protect his or her business.     To obtain an appraisal that is accurate and will be accepted as an “expert opinion” by the Court, getting the right advisors on board for legal and business-valuation advice is critical.

An attorney with experience handling cases involving business valuation can identify business valuation experts who are competent and experienced and can generally identify those who should be avoided.

Hiring an accountant or other financial professional who dabbles in business valuation may save money on the front end, but an inexperienced valuator’s missteps may ultimately cost thousands of dollars or more in the end. The old adage, “you get what you pay for” applies to business valuation, and divorcing business owners must be careful not to compromise their entire case by hiring inexperienced appraisers.

Divorce attorneys experienced in business valuation cases will have a working relationship with a number of business valuation experts who know the high standards expected in these types of cases.  Warning signs that an appraiser lacks the experience or ability to render an opinion that a Court will accept as “expert testimony” include:

The valuator possess inferior credentials to appraise a business;
The valuator fails to follow ethical and professional standards that govern business valuation;
The valuator acts as an advocate or “hired gun,” ultimately compromising his or her expert opinion with the Court;
The valuator has no experience defending his or her position during cross-examination;
The valuator produces reports filled with typographical, grammatical and mathematical errors ultimately compromising the integrity of the entire report.A business valuator whose opinion is undermined during cross-examination due to sloppy investigation, poor attention to detail or an unethical approach can ultimately cost business owners more than their case.  The business could also be stuck with an appraisal that  may be used to its disadvantage in another context, such as obtaining financing or selling future interests in the company.

Protecting your business in the wake of a divorce to prevent the unwanted transfer of ownership or to mitigate the power of an unwanted shareholder requires planning before the corporation finds itself faced with a divorcing owner. Anticipating the divorce of an owner and planning for such an occurrence is a smart business practice and will go a long way in protecting your business from an event that very likely may occur.

Keeping the Books

When business owners get divorced, the business should expect a thorough examination of its books and records.  If the business is being valued, the appraiser will request records going back at least three to five years.  Even if the business is not being valued, its books and records may be examined by lawyers and/or forensic accountants for purposes of tracing cash flow that may be available to the divorcing owner(s). This examination can spin off unexpected consequences for the business. Such intense scrutiny can pose a risk to businesses whose books are not kept in accordance with generally accepted accounting standards or, worst-case scenario, not in compliance with state and federal law.  Some of the book keeping situations businesses may wish to clear up now – rather than later, when a divorce is imminent – include:

Documented “loans” to shareholders for which there are no promissory notes or payment and that are not reported as income;
Income reported on the books that is inconsistent with the lifestyle of the divorcing owner(s), which may indicate unreported cash being taken out of the business; Payment of personal expenses through the business which are not reported as income;
Financial statements that are puffed up  for borrowing purposes but may later be used  against the company for valuation purposes;
Appraisals of the Company for purposes of marketing the company for sale that can later be used as an indication of value in a divorce case.

In addition to documents and other information that disclose internal management of the business, other sensitive information may have to be produced.  For example, the company will likely be required to produce detailed revenue, salary and benefit information.  Although this information may have to be produced for purposes of the divorce case, business owners may wish to require that divorcing owners, his or her spouse,  consultants, accountants, lawyers and others with access to the information sign a confidentiality agreement in which they are bound not to disclose the information unless legally required to do so.  If the information is subpoenaed, the business’s attorney may seek a protective order from the court, which may in turn order precautionary measures to keep the information confidential.  The business’s attorney also may wish to request that the court place the information under seal so that it is not available to third parties without the court’s permission.

By:  Divorce Lawyer in North Carolina, Cathy Hunt  - Cathy C. Hunt is a former judicial clerk for the Honorable Adolpho A. Birch, Jr., former Chief Justice of the Tennessee Supreme Court. Cathy received her J.D. degree in 1996 from the University of Memphis where she was a member of the Law Review. athy has participated in large antitrust and class action cases involving complex document production. Her corporate law experience provides her with the expertise necessary to understanding complex equitable distribution cases, especially those involving business valuation issues. Cathy has also successfully completed the exam for the American Society of Appraisers Business Valuation course BV201.

This entry was posted on Saturday, June 28th, 2008 at 6:27 pm and is filed under Separation and Divorce. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.