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.