A business valuation can be one of the most significant financial issues in a divorce, and understanding the valuation process can help you navigate the financial complexities involved. Below are answers to key questions that many business owners face during a divorce.
Q: Who determines what my business is worth?
A: In a divorce, the value of your business is most often determined by a qualified business valuation expert. The expert performs an independent analysis using accepted valuation methodologies and the specific facts of your business. Ultimately, if the parties cannot reach an agreement, the court determines the value after considering the evidence presented.
Q: What goes into determining the value of my business?
A: A business valuation considers many factors, including the company’s historical and expected financial performance, assets and liabilities, industry conditions, economic trends, ownership structure, and the risks associated with the business. The valuation expert also considers the purpose of the valuation and the applicable legal standard of value.
Q: What financial documents will the valuation expert need?
A: While every engagement and every business is different, common requests include tax returns, financial statements, general ledgers, bank statements, payroll records, depreciation schedules, loan documents, ownership records, customer or vendor information, and other documents needed to understand the company’s operations, financial performance, and risk profile.
Q: How do personal expenses paid by the business affect the valuation?
A: Personal expenses paid through the business can affect the value of the business by understating its true earnings. While these expenses are typically adjusted during the valuation process, significant personal expenditures or questionable transactions may require a separate forensic accounting analysis to determine the company’s normalized earnings.
Q: Why does the valuation expert adjust the company’s financial information?
A: Financial records often contain items that are not representative of normal business operations. Adjustments, referred to as normalization adjustments, remove unusual, nonrecurring, or discretionary items so the valuation reflects the company’s ongoing earning capacity.
Q: Will my salary affect the value of my business?
A: It can. If an owner’s compensation is significantly above or below what would be paid to someone performing similar duties, the valuation expert may adjust compensation to a market-based amount. This helps estimate the business’s true profitability independent of the owner’s personal compensation decisions.
Q: How long does a business valuation typically take?
A: The timeline depends on the complexity of the business and how quickly necessary documents are provided. Many valuations are completed within several weeks, while more complex matters involving multiple entities, incomplete records, or extensive forensic analysis may take several months.
Q: What happens if my accounting records are incomplete or inaccurate?
A: Incomplete records do not necessarily prevent a valuation from being performed. The valuation expert may use alternative sources of information, perform additional analyses, or make reasonable assumptions where appropriate based on the information available. However, incomplete records can increase the time, cost, and complexity of the engagement.
Q: Can the value of my business change while the divorce is pending?
A: Yes. Business value can change as the company’s financial performance, industry conditions, or the broader economy changes. In most divorce matters, however, the valuation date is established based on applicable law, agreement of the parties, or court order, and the valuation is performed as of that date.
Q: How can I prepare for a business valuation and help the process go more smoothly?
A: Organize your financial records, respond promptly to document requests, and be prepared to explain how your business operates. Providing complete and accurate information early in the process may reduce delays and allow the valuation expert to perform a more efficient analysis.
Q: Can I use the valuation that was prepared for another purpose, such as (estate planning, SBA loan, buy-sell agreement, etc.?
A: Usually not. A valuation prepared for another purpose may use a different standard of value, valuation date, or assumptions than those required in a divorce matter. While a prior valuation may provide useful background information, a new valuation is often necessary to address the specific legal requirements of the case.
Q: What happens if my business had an unusually good or bad year?
A: A valuation expert typically considers multiple years of financial performance rather than relying on a single year. If a particular year was affected by unusual or nonrecurring events, appropriate adjustments may be made; consequently, the valuation reflects the business’s ongoing earning capacity rather than a temporary spike or decline.
Conclusion
To ensure you are fully informed during this process, it is important to work with an experienced valuation professional. At DiSanto, Priest & Co., our Business Valuation, Forensic and Litigation Support team has extensive experience providing independent business valuations and forensic accounting services in matrimonial matters. We are committed to delivering well-supported analyses and guiding clients and their attorneys throughout the valuation process.
To learn more, please call us at (401) 921-2000 or contact us here.