The Importance of Business Valuation in Divorce
When the marital estate includes one or more businesses, it may be necessary to hire an expert to perform a business valuation to properly assess the value of the estate.
What is a business valuation?
A business valuation is the process of determining the economic value of a business and typically involves an examination of the historical financial activity and anticipated future income of each business. The parties may agree to share a business expert, which is typically less costly than each party retaining their own individual expert to perform separate valuations. A joint, or shared, expert has a fiduciary duty to both parties in determining the value of a marital asset.
Retaining separate business experts may be appropriate based on the facts and circumstances of the case. It is generally uncommon for both parties to be in equal positions with respect to knowledge and involvement in the business interests and marital finances during the marriage.
What if my spouse hides income from our business?
If the business spouse excluded their partner from financial knowledge in their marriage and precluded them from information related to their businesses and financial matters, it would benefit the non-business spouse to hire their own business expert. The expert could not only investigate the business spouse’s financial activity during the marriage and valuate the business interests but also educate the non-business spouse on the business interests and help them understand potential future financial obligations associated with each business. Additionally, the non-business spouse may be required to retain business interests after a divorce due to a lack of sufficient liquid or semi-liquid assets needed for an equitable share of the marital estate. A business expert can play an essential role in helping the non-business spouse make informed decisions about which business interests are most suitable to retain in the division of the marital estate.
The role of a business expert is especially important when the value of a business is disputed at mediation or trial. In some cases, competing experts may disagree on which methodology is appropriate for determining the value of a business.[1] A seasoned business expert can effectively explain to a mediator or judge how the methodology used in his or her valuation is best suited based on the unique circumstances of each business. Methodologies that are commonly used to determine the value of a business include:
Income-based approach, which focuses on the earning capacity of a company.
Market-based approach, which involves the comparison of a company to other similar businesses.
Asset-based approach, which focuses on the value of a company’s underlying assets.
How do I find a business expert for my case?
The best way to find a skilled business expert that fits the specific needs of your case is often through your attorney. Divorce attorneys with extensive experience in cases involving complex financial issues routinely collaborate with respected business experts in their jurisdiction and recognize that engaging a skilled business expert early in the divorce process may be critical to achieving an equitable division of the marital estate.
Contact Campbell Perky Johnson, PLLC in Franklin, Tennessee to connect with experienced divorce attorneys who will help you navigate the divorce process and ensure that your financial interests are protected.
The foregoing discussion should not be construed as legal advice on specific situations or subjects.
[1] See Byrd v. Byrd,2022 WL 16548578, at *22 (Tenn. Ct. App. Oct. 31, 2022) (“There are a number ofacceptable methods available for determining the value of a business, includingthe market value method, the asset value method, and the earnings value or capitalizationof earnings method, and there are still others, such as the dividend method andthe liquidating value method.”) (Internal citations omitted). In Tennessee, when the value of a business isdisputed, “the court may place a value on the property that is within the rangeof the values represented by all the relevant valuation evidence.” Owens v. Owens, 241S.W.3d 478, 486 (Tenn. Ct. App. 2007).