If one or more people in a marriage own a business and they are getting a divorce, what happens to the business? A business valuation can answer many of the questions about the value of the business including:
- Is the business owned by one partner, or by both partners?
- What is the business income?
- If one partner is not an owner of the business, did they contribute to its success or growth?
- What is the projected future revenue?
- What is the fair market value?
- Will it be sold?
- Will one partner buy the other partner out?
- How will the business income be split?
- What are the tax issues and liabilities?
The business valuation of the business is vital to a fair settlement of your divorce case. The starting point really is knowing what the value of the business is and what the income is, regardless of whether you are a self-employed owner of a business or not.
WATCH: Attorney Abigale Stolfe explains what happens to the business during a New Jersey Divorce
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If you or your spouse own a business in New Jersey and are getting a divorce, the business could be a critical issue in your divorce settlement. To protect yourself and your future, it’s wise to contact a qualified attorney from New Jersey Family Law Group. Our legal team is committed to securing a bright future for our clients and their families through guided insight and zealous advocacy and fighting to protect what they have worked so hard to earn.
Contact our attorneys at Stolfe Zeigler today at (732) 585-1651 to get started with an initial case evaluation.
This is Abigale Stolfe from the New Jersey Divorce Group, and today we’re going to talk about business valuations.
When you own a business, whether you are the working spouse or whether you are the non-working spouse, if you have an ownership interest in the business, chances are you’re going to need a business evaluation. The business evaluation is not a business evaluation that uses the same standards as that which you would use to sell to a third party. So, the factors and the discounts that a court will give in divorce litigation are different than those factors and discounts that you would receive in a third-party sale transaction.
That’s a key difference in just going to your standard accountant and asking for a business evaluation and using a forensic business evaluator in a divorce litigation. There is a discount that your personal business accountant will apply that is not applicable in divorce litigation.
So, the first step you’re going to want to do is have a conversation with your lawyer about proposed business evaluators. There are two ways to proceed in a business valuation:
1. The first is you can hire a joint business evaluator, which means that you and your spouse will use one evaluator who will do all the calculations for both of you and will present that information to you.
2. Your second option is to retain an individual business evaluator. What that means is you’re hiring your own expert who will talk to your spouse, but who will not discuss the litigation strategy with your spouse. So, if you want an evaluator who you can discuss litigation strategy with, you will want to hire your own evaluator. If you don’t intend to use that evaluator for a litigation strategy, then a joint evaluator is perfectly fine because the standards for the evaluation are going to be the same no matter which way you go.
What do I mean by that? Well, the evaluator is going to need certain financial information, tax returns, bank statements, credit card statements, certificates of incorporation, operating agreements, any buyout agreements if you had sold to a prior partner, any perspective evaluations if you’re planning to sell down the road or if there was a plan to sell down the road, retirement account statements, anything relative to the financial picture of the business. They may also want the invoices to and from the business, payroll, a litany of financial documents depending on the type of business that you’ve run and the obligations that the business has.
And every case is similar and unique. So, when you have the initial conversation with your attorney, they’re going to give you a list of documents that are absolutely unequivocally needed in every case but be aware that the evaluator is going to come back to you with a whole other list of documents that they need based upon the unique circumstances of your case. Therefore, the sooner you begin to gather documents, the easier it will be going forward to get all the pieces together and of course the quicker the evaluation will be completed.
The evaluation completion date is very important because when the evaluation is completed, that’s when negotiations can really begin.
Typically, in the context of a business valuation, we also request a cashflow evaluation. What that means is tell us how much this person actually earns on an annual basis because your tax return is reflective of your taxable income, but not necessarily reflective of your owner’s compensation, the total amount you receive from the business, because there are certain expenses that an owner, or benefits I should say, that an owner receives that are expenses of the business. So, one is not really comparative to the other, right?
So, when we hire the forensic evaluator to do the business evaluation, we oftentimes, most oftentimes also request that that same evaluator prepare a cashflow evaluation to give us an idea of the compensated spouse’s income. Why do we need that? Well, alimony and child support, maybe a college contribution, maybe if there’s a buyout of the business, we need to know the annual compensation so we can structure the buyout plan.
There are many reasons why you would need to know the income of the compensated spouse that’s beyond just support. So, it really does make the most sense when you engage a forensic evaluator to do your business evaluation to also engage them to prepare the cash flow evaluation. A lot of the information overlaps in the two different calculations, and really, you don’t want to pay for it twice. If you can do it on a parallel track, it’s much more time and cost-effective for you.
So, once you get that document back, then, as I said, you can begin having your conversations about settlement and moving your case forward. Because once those documents are in our possession, once we know the value of your business, once we know the income stream, we can formulate a plan, whether it’s a buyout plan, whether it’s an alimony plan, we can structure the child support. We can structure the funding of trusts for the children. We can structure the 529 contributions.
There’s a myriad of ways we can settle your case, but the starting point really is knowing what is the value and what is the income? And that’s the starting point in any case, regardless of whether you are a self-employed owner of a business or not.
Once we have that information and we can sit at the table, usually, and I’m saying usually because it is most often that the parties come to an agreement, use the forensic evaluator as a mediator. This goes back to the choice of evaluators, right? I started by saying an individual or a joint, and you don’t want to use your personal accountant to prepare this evaluation.
So, let’s say you’re steadfast that you’re going to use your personal accountant for the evaluation, and if my spouse wants to get an evaluation, they can do it on their dime. Okay, well, you can do that, but now the problem is we are going to go to now another person who’s going to act as the mediator who now has two conflicting evaluations. Even worse, what if we have to go to the judge and the judge has two conflicting evaluations?
You are best served in time and money by using an evaluator who is well-versed in matrimonial law, who can sit in the seat of an evaluator, and then, by agreement and with the parameters clearly defined, flip their role to mediator. In many, many, many cases, that flip of the switch allows a settlement to occur. Now, it necessitates everyone agreeing to the numbers prepared by the forensic evaluator or agreeing to approximately the numbers prepared by the forensic evaluator.
So, we’ve had cases where the forensic evaluator has come back and said, “I think that the business is worth X,” and a client may say, “Yeah, but didn’t discount for the premarital component.” So, we go back, and we say, “Well, if you were going to discount for the premarital component, why didn’t you?” Any evaluator may say, “You know what, I didn’t for these myriads of reasons, but had I discounted, this would be the number I would use.” So, with that little bit of additional information, it still allows you to sit at the table and come to either a settlement or at least forward movement towards a settlement.
So, this is why the choice of your evaluator is very important to you because it does kind of set the pace and the trajectory for your case. If you and your spouse are at complete odds and you have two different evaluators and you can’t sit at the table together with an evaluator to figure out a movement and resolution and there’s just battle, battle, battle, well, then chances are you’re going to trial. If you’re going to trial with these two different evaluators, both evaluators are going to come in and testify and the court’s going to consider not only their credibility as the court will consider your own credibility, but the court will also consider why their numbers are significantly different.
Now, the court is not bound to adopt either evaluator’s numbers. They’re not. The court can make up its own numbers depending on all the information and facts that the court receives, and the court can prepare its own calculation, which neither you nor your spouse agree to. It’s the number of the court came up with. That is perfectly within reason to expect.
The court may have to reject your evaluator for whatever reason. Let’s say we use the premarital example. Your wife’s evaluator didn’t provide any premarital exemption. Your evaluator provided premarital exemption. The court finds there was a premarital component. Now, maybe your wife’s evaluator’s number is eliminated because there’s no consideration of that component, but that doesn’t mean that your evaluation is accepted. All it means is that your wife’s number is not accepted. The court could still say, “Well, you know what? Yeah, your evaluator used a premarital component, but it is so significantly out of whack, I can’t use that either. So now I’m forced to come up with my own number.”
So just because one is discounted, and one is accepted does not mean it’s going to be used. It just means that the evaluation wasn’t rejected.
This all brings us down to the following:
If you and your spouse can find a way to agree to a singular joint evaluator to conduct your business evaluation and cashflow evaluation, then you can sit with that evaluator to participate in mediation or a series of mediation sessions:
- your case will settle quicker,
- it will likely be more cost-effective,
- and it will allow you to move forward from this process into the next phase of your life much quicker and easier.
If you need help finding a business valuator OR if you need help participating in the mediation or whatever stage of the process you’re in, give us a call. New Jersey Family Law Group, 732-240-9555.