Business Valuations in Divorce Mediation in CT or Collaborative Divorce in Connecticut – To do or no
Should we do a Business Valuation if we are in the process of Divorce Mediation or Collaborative Divorce? Cost is a factor, however, relative to divorce litigation, a Business Valuation performed with mutual agreement in divorce mediation or collaborative divorce can ultimately be less expensive.
Business ValuationsWhile divorcing spouses have ongoing conflict regarding the value of a business, trained mediators and collaborative counsel can break the conflict cycle. The impasse is resolved if divorcing spouses remain committed to avoiding long drawn and costly litigation battles and agree to a mutual and neutral platform for placing a dollar value on the business. Divorce attorneys in Connecticut and general accountants do not have the requisite specialized training to help divorcing couples with business valuations. Calculating the value of a business isn't an exact science. Hence the existing conflict and consequent cost that will need to be incurred in resolving the gridlock. Just as a bank performs a certified valuation of a real-estate before issuing a mortgage, or dealer valuates a diamond ring or an automobile, or an actuary valuates a pension benefit, an expert business valuator ensures that fair market value of a business is derived after reasonable knowledge of the relevant facts. The Institute of Business Appraisers (IBA) and the American Society of Appraisers (ASA) have issued standards for valuing businesses, therefore valuators can apply similar procedures. This helps to ensure that even if two different appraisers arrive at different values, the values will be close. Finding the right expert is important in preparing a business valuation. The appraiser should be familiar with state divorce law in CT. The spouses should interview the valuator together and mutually decide who will perform the service. A mutual and neutral decision ensures that at the end of the process both spouses will be comfortable with the values.
Standard of Value -- Fair Market Value v. Investment ValueIn valuing a business, the appraiser must define what "standard of value" the appraiser will use. While few cases specifically discuss the standard of value in divorce cases it appears that case law gives lip-service to the term "fair market value." Very simply put, "fair market value" is the amount at which a business interest would change hands between a hypothetical willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.
There are three Approaches that a Business Appraiser may use to valuate a business:1. The Income Approach: Using an income approach the business is valued on the basis of the income stream the business generates. The income approach is probably the most widely used approach in business valuation. Under the income approach, the value of the business is based on the company's earnings, or the future earnings that the business is expected to produce. The company's earnings stream or future benefits is converted to a present value. This is done by either capitalizing the current benefits using an appropriate capitalization rate, or by discounting the future benefits using an appropriate discount rate. The capitalization of earnings method derives the company's value by looking at a single period of normalized earnings stream. The discounted future earnings method is derived by looking at the company's normalized earnings stream to be received over a number of years in the future. Using an income approach, there is a direct relationship between the amount of earnings or benefits the company will generate and its value. 2. The Market Approach: Using a market approach, the business is valued based upon referenced to other transactions -- in real estate referred to as comparable sales. Publicly Traded Guideline Company Method: In this method valuation the valuator finds publicly traded companies which are comparable. The valuator examines the multiples from the prices and financial data of the guideline companies and applies these multiples to the financial data of the business being appraised. Comparative Transaction Method (Mergers and Acquisition Method): In this valuation method the appraiser finds companies that have been sold which are comparable. The valuator examines the multiples from the prices and financial data of such companies and applies these to the business being appraised. Past Transactions Method: This method of valuation is often significant in divorce valuations because it uses any past transactions of the companies own stock. Similarly, "buy-sell agreements" are often considered by the divorce courts in fixing the value of a business -- especially when they are negotiated when a divorce is not contemplated. 3. The Asset Based Approach: Using an asset based approach; a business is valued on the basis of its assets and liabilities. Under this method of valuation, the company's assets and liabilities are adjusted to their current fair market value. Under this method the valuator in a divorce valuation is generally valuing the business on the basis of a going concern value. Occasionally, a business will be in the process of liquidation and, if so, the valuator will adjust the assets and liabilities to their fair market value (not as a going concern) but based upon the premise that the business will be liquidated.
In ConclusionBusiness Valuations should be done if the spouses can not agree on a value or if they are uncertain as to the value. Finding the right expert is important in preparing a business valuation. While it is common for one spouse to want the valuation and for the other to refuse, the cost of valuation being a factor, money well spent now during the divorce process on one valuation performed by a neutral and mutual valuator is money well spent relative to the cost the couple can incur relative to separate valuations (2 separate valuations performed by different professionals), divorce litigation fees and the total cost of a fully litigated divorce matter.