Divorce filings increase at the beginning of the year, with January experiencing one-third higher filings than in other months, according to the American Academy of Matrimonial Lawyers.
When family assets are split between spouses, an already emotionally draining process can also become financially taxing. These assets generally include real estate, automobiles, cash, retirement accounts, pensions, and privately held business interests.
Many assets are relatively easy to value by looking out on the open market. Other assets, primarily privately held business interests, are often the largest and most difficult assets to value. If you have a privately held business interest and anticipate a divorce in 2016, keep in mind the following concepts.
Fair market value
When going through a divorce in Missouri, all business interests must be valued using the "fair market value" standard of value. The IRS Revenue Ruling 59-60 defines fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell; both parties having reasonable knowledge of relevant facts." Fair market value is not the value a company might actually sell for to a synergistic buyer, but rather, the price that would be paid by a single investor on the open market. It doesn't contain any added value from a combination and often factors in a discount for lack of control (for minority interests) and a discount for lack of marketability.
Separate vs. marital assets
Even if your business was owned prior to the date of marriage, and is considered by the court to be a separate asset, you may still need to have it appraised. People often think that when a business was owned by just one party before marriage, its value is irrelevant. However, if it's a large business that makes up an important percentage of the couple's general asset base, the court may still want to know what the company is worth when determining how to distribute the rest of the couple's assets. The Brown Smith Wallace Transaction Advisory and Litigation Support team recently performed two valuations for a couple that had two business interests: one separate and one marital. Valuing both companies helped the couple settle the case and spared them additional attorneys and accountants fees.
An independent appraiser
There are three generally accepted approaches to valuing a business‒an asset approach, an income approach and a market approach. It is up to the independent appraiser or valuation analyst to determine if a single method or a combination of the three methods should be relied upon.
Business valuations are complex engagements that require the services of a qualified independent appraiser to determine the fair market value of the interest. When determining who can help you determine the value of your or your spouse's business interest, be on the lookout for someone that is a Certified Valuation Analyst (CVA), Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), and/or a Certified Business Appraiser (CBA). These individuals are well versed in business valuation theory and have undergone the requisite training required to give you sound opinions of value.
If you're contemplating divorce and have a privately held business interest, visit bswllc.com to schedule a meeting on business valuation considerations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.