Dividing marital assets can be a long, complicated process, especially if a divorce case involves a private business interest. Failure to hire a business valuation professional — whether to try to save money or time — can prove disastrous in court.
Complex valuation matters
Business valuators can provide answers to five critical financial questions in a divorce:
1. How much is my business interest worth? There are three ways to value a business: the cost, market and income approaches. All these techniques start with the company’s financial statements. But discovery shouldn’t stop there, particularly for spouses not involved in day-to-day business operations. Valuation experts should be given equal access to financial records and opportunities to tour the company’s facilities and interview management. Inadequate discovery can cause an expert to miss critical information, possibly leading to inaccurate value opinions.
2. How much value should be included in the marital estate? If the business interest was owned before the marriage, it might be appropriate to include in the marital estate only the appreciation in value over the course of the marriage, depending on the facts of the case and relevant state law. Estimating appreciation in value requires a comparison of the current value of the business interest vs. its value on the couple’s wedding day.
3. Does the asset allocation overlap with maintenance payments? Another reason to exclude a part of the business’s value from the marital estate relates to the concept of “double dipping.” This may happen when a spouse receives double recovery for a single asset. For example, courts in some states have decided it’s inequitable for a spouse to receive maintenance payments based on his or her spouse’s future income, along with half of the business’s value based on its ability to generate future income.
In states that find double dipping unfair, the value of the business’s goodwill (or a portion of it) may be specifically excluded from the marital estate. Before goodwill can be excluded, however, it must be valued. Often, this requires goodwill to be split between personal and business goodwill. The former is linked to the individual owners and their abilities to generate future income. Usually, personal goodwill can’t be transferred to a third party.
4. Is the controlling shareholder hiding anything? The spouse who controls the business may try to hide income or assets to achieve a more favorable divorce settlement. Downplaying assets and income (or, conversely, exaggerating liabilities and expenses) can lead to 1) lower business valuations, and 2) reduced payments for child support and maintenance — unless the valuation expert identifies the anomaly and makes an adjustment for the value of the missing or inaccurate item(s).
5. Do the financial statements need adjustments? Reasonable “replacement” compensation — based on the market value of the owner’s contribution to the business — is a common adjustment in divorce cases. Additionally, some business owners try to deduct their personal attorney’s fees or expert witness fees as business expenses. Running personal expenses through the business not only reduces the value of the business interest, but also could expose the noncontrolling spouse to IRS inquiry.
Other adjustments may be needed to normalize the business’s earnings to benchmark the subject company against comparable companies. Examples include adjustments for nonstandard accounting practices (such as cash-to-accrual basis of accounting changes) and for nonrecurring income or expenses (from, say, a discontinued product line or the sale of a nonoperating asset).
Case in point
The parties in a divorce case might not be required to present expert valuations of marital assets at trial. But Roberts v. Roberts, a recent Mississippi appellate court ruling, shows why it’s a good idea to hire an expert from the start (No. 2023-CA-00934-COA, Miss. Ct. App., Feb. 25, 2025).
In this case, the husband owned and operated a solo real estate appraisal firm. Although the business was the couple’s main asset and income source, neither spouse presented valuation evidence. However, the husband testified that his business had “zero” value — beyond the value of his personal computer — because he couldn’t guarantee that his customers would hire another appraiser who might buy his business.
Left to his own devices, the chancellor hearing the case valued the business at roughly $150,000, based on its average income from the prior four years. The court awarded the husband sole ownership of the business and ordered him to pay his ex-wife monthly maintenance, reasoning that she was left with a “deficit” because the husband received a greater share of the marital assets and his earning capacity greatly exceeded hers.
The husband appealed, arguing multiple flaws in the chancellor’s decision, including that the chancellor had erroneously valued the business. He also challenged the chancellor’s maintenance award.
The appellate court ruled that, under Mississippi law, the husband’s reputation and ability to earn income as an appraiser can’t be counted as both 1) an asset in the division of marital property, and 2) a continuing income stream for maintenance award purposes. Moreover, the wife presented no expert testimony that the business had any value separate and apart from the husband’s personal reputation and ability to work as a real estate appraiser.
As a result, the judgment was reversed, and the case was remanded to the trial court for a new valuation and equitable division of the marital estate. The maintenance award was also remanded for further consideration based on any changes to the equitable division of the marital estate.
The outcome in Roberts might have differed significantly if the parties had hired valuation experts. For instance, valuation evidence might have precluded the chancellor from performing a makeshift valuation using the business’s income, thereby avoiding the time and expense of an appeal. Or, valuation evidence supported by credible expert analysis might have established the presence of business goodwill — not solely tied to the husband’s personal reputation — that could have been included in the marital estate. However, without formal business valuations, equitable distribution of the marital estate was left to the court’s discretion.
Seek professional expertise
When a divorce case includes a business interest, it’s often one of the biggest line items on the marital balance sheet. While it may be tempting to perform a do-it-yourself business valuation in an attempt to save money, that approach can ultimately be costly. Shortcuts, such as industry rules of thumb, net book value and buy-sell formulas, often lack market-based support. Contact us for a formal valuation that will withstand court scrutiny. Our experienced valuation pros understand how courts handle challenging divorce issues in your jurisdiction.
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