Ending your marriage is a stressful experience that is made even more challenging when the couple shares a closely held business. Valuing a business for divorce is generally necessary in these circumstances to assess the equitable allocation of marital property.
Often, spouses will dispute the value of the organization, necessitating a formal business appraisal to assist the court in determining the value of the company. Understanding what to expect throughout the process of getting a divorce can be beneficial when negotiating business interests and attempting to reach an amicable settlement.
Below, Connecticut and New York divorce attorney Heidi Opinsky covers several points couples should consider if they own a closely held business and want to dissolve their marriage below.
The Standard of Value When Valuing a Business For Divorce
Prior to starting an appraisal, business valuation specialists must identify a value standard. Also called a standard of value, this is a collection of theoretical circumstances under which the organization will be evaluated. The two commonly accepted categories for business valuation in divorce are fair value and fair market value. Although they sound similar, these two standards are different.
What Is Fair Market Value?
Fair market value is defined at the price a property transaction would willingly take place between a buyer and seller who both have a reasonable understanding of the facts at hand, provided the buyer is not compelled to make a purchase nor is the seller compelled to sell. An appraiser will often apply certain discounts under fair market value, such as a discount for lack of marketability (DLOM) or a discount for lack of control (DLOC) in order to secure the value of minority interests.
What Is Fair Value?
Fair value, on the other hand, is similar to fair market value in certain aspects, but it does not often require the addition of minority discounts. The court that has jurisdiction over the divorce case determines what the fair value of a property would be.
The above-mentioned standards might result in drastically differing value assessments. Business appraisal specialists must choose the appropriate standard of value in matrimonial disputes, or their professional views may be disregarded by the court.
Common Issues to Be Aware Of When Valuing a Business For Divorce
Fraud
A spouse that owns a business may be tempted to engage in fraud in order to safeguard their individual financial interests. During a divorce, a business owner may seek to hide or move assets, underestimate earnings, or misrepresent costs. If you suspect such behavior, you may need to enlist the help of a forensic accountant. This type of professional can help you create a marital profile, interview your spouse, and conduct a comprehensive investigation into the allegedly fraudulent activity.
Double-Dipping
When one partner operates an organization, the question of “double-dipping” sometimes emerges. The concept of double-dipping relates to the concept that a spouse could be compensated twice for business revenue—once during the equitable division of marital property and again when assessing revenue available for alimony or spousal. The foundation of the case against double-dipping is found in how an organization is valued.
One of the most often utilized approaches for valuing companies in divorce disputes is the “income strategy,” or the income approach. The appraiser uses this method to evaluate the value of a business using the current value of the revenue the business is likely to earn in the future. Many people contend that determining an organization’s value based on its future revenue and then requiring the higher earning spouse to pay spousal support from that same future revenue stream is unjust and can be considered double-dipping.
Protect Your Closely Held Business With a Prenuptial or Postnuptial Agreement
You can help protect your right to your fair share of a closely held business by drafting and signing a prenuptial or postnuptial agreement. This is a document that essentially allocates property and determines alimony before a divorce, and couples are generally legally bound to abide by the terms of the agreement upon dissolving their marriage, even if they later change their mind.
How Connecticut & New York Divorce Lawyer Heidi Opinsky Can Assist You
Heidi E. Opinsky is an experienced Connecticut and New York divorce lawyer that has a proven track record of helping business owners successfully dissolve their marriages. Contact Attorney Opinsky today to learn more about valuing a business in a divorce or to book your consultation at 203-653-3542.