Business Valuation and Division
In a divorce proceeding the value of a business is often at issue because the value of a business that was operated during the marriage may be subject to division by the court. In simple terms, if a business has value (real or manufactured in someone’s imagination), the non-business running spouse may be awarded in cash, 50% of the value of the business. This value can dwarf all other issues in the case and winning the battle on putting a value on the business can be worth large sums of money to both sides in the case.
This is a very complicated issue and not one to be entered into lightly, or entered into without experience in the issue. There are a multitude of complex and nuanced issues that can materially impact the value the court places on a business and can literally change the value of a business by hundreds of thousands of dollars, if not millions of dollars. Both sides in a divorce where the value of a business is at stake will fight tooth and nail over the issue because so much money is often involved and often the differences in the valuation placed on the business by each party is striking. Much of the difference may come from different valuation techniques, and different interpretations of the law.
For example some businesses may be pre-marital in nature. That is the business may have been started before marriage, but continued during the marriage, and one spouse may or may not have contributed anything of value to the business. One challenge is determining what the pre-marital value of the business is and what is the marital value of the business. That is what portion of the business value was created before marriage, and what portion of the business value was created after marriage. The value created before the marriage is usually not available to the non-business owning spouse and therefore how this issue is decided can be very important.
As an example, in one case that Shaw Law Firm represented the business owning spouse (the wife in this case), the business was inherited by the wife at about the time the parties were married. The husband and wife thereafter ran the business for 22 years prior to divorce. The husband held the position of president in the business, at least in title. The husband wanted 50% of the on-going value of the business, and he and his attorney valued the business in the low seven figure range. Paying half of this money to the husband would have wrecked the business. The wife’s original attorney had no idea how to address the issue, and therefore ignored it. Shaw Law Firm was brought in as the Wife’s second attorney in the middle of the case. The appropriate tact in this case was to retain the best business valuator in the city, and place a value on the business. Not just a nominal value, but a value adjusted for the rate of inflation over the 22 year period of time that the couple ran the business. From this, it was also necessary to determine what the value of the business was when the wife inherited the business. When the numbers came back, it turned out that the real value of the business, after deducting the value of the business 22 years ago, had only increased by $25,000 over 22 years after adjusting for inflation. Evidence was also discovered that the husband’s contribution to the business, despite his title as president and having worked full-time in the business over 22 years, was not beneficial to the business. In fact the husband was primarily responsible for the underperformance of the business during his tenure.
Each case is different, the tact taken on each case will vary, but in this case we were able to gather the facts, and utilize an expert that we had worked with in the past, to minimize the marital interest in the business and save our client’s business. The client was literally on the verge of settling with her husband and paying him a mid-six figure sum in order to satisfy the husband’s demands. Instead, after properly preparing the case, the husband walked away with only $25,000 from the value of the business and the wife retained her business free and clear and is currently running it until she can turn it over to her children some day.
Other cases may be decided on a legal technicality. For example, if you run a professional business, say as a doctor, lawyer, dentist, accountant, consultant, whatever the profession, an issue that often comes up is the value of goodwill. Goodwill is an invisible asset that has little to do with the existing profit margins of the business. Goodwill also has two components to it that are often ignored: enterprise goodwill and professional goodwill. If a party ignores these distinctions, that party has ignored what may comprise the largest portion of the value of a professional practice. Many states have determined that professional goodwill (as opposed to enterprise goodwill) is not an asset that is distributable to a spouse in a divorce proceeding and therefore safe from your spouse. Other cases have come to the opposite conclusion. Whether you are the business running spouse or the non-business running spouse, these are the sort of issues and distinctions that your attorney must be able to identify and articulate and it can make a very large difference in the outcome of the case. In some cases it will be the single most important financial aspect in the divorce. Resulting in the difference of hundreds of thousands if not millions of dollars to the final result.
Contact us or call today to learn how Shaw Law can work with you to achieve the best outcome possible for you and your children.
Scott Shaw is founder and principle of Shaw Law Firm LLC, founded in 1995 and dedicated solely to divorce, family law and child custody matters that must be addressed and decided in the state of Georgia. Shaw Law Firm serves the greater Metro Atlanta area, particularly the counties of Fulton, Gwinnett, Cobb, Cherokee, Forsyth, Paulding, Henry, Fayette, Coweta, Newton, Walton, Bartow and Douglas. Schedule a consultation today at 770-594-8309.