Michael B. Lehner, CPA/ABV, CFE, ASA
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Achieving a fair settlement in divorce

business valuation Achieving a fair settlement in divorce

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Divorce is inherently acrimonious and difficult — and when a case ends up in court, both parties can be reluctant to cooperate, making a fair settlement difficult to reach. In such a situation, an experienced financial expert can be key in ensuring assets are fairly appraised and the split is equitable.

Improve discovery

Inadequate discovery can impede a fair asset split. When divorcing spouses own a business, it’s usually their biggest, most illiquid asset. But the spouse who controls the business sometimes holds back on releasing certain information, such as financial statements, tax returns, business plans, contracts and marketing materials.

Some divorcing spouses may be unscrupulous and actually hide assets or income. Others may simply argue that giving an appraiser access to this information breaches the company’s security and interrupts business operations.

When valuing a business, an appraiser needs access to information that’s known only to insiders. Involve your financial expert early on to improve the scope of discovery. Ask him or her for a comprehensive list of documents and procedures needed to complete the job.

Uncover assets

Sometimes spouses hide assets in anticipation of an impending divorce. Or a business owner might delay reporting income or overstate expenses until his or her divorce is settled.

Suppose Mrs. Smith has opened a bank account under her adult daughter’s name and has set aside $50,000 over the last year. She suspected Mr. Smith of being unfaithful, and wanted funds set aside in case he left her. But the $50,000 legitimately belongs in the Smiths’ joint marital estate — regardless of which spouse might be in the wrong.

If you or a client suspects that the other spouse is concealing assets or income, the scope of an assignment may need to be expanded to investigate financial misstatement and asset misappropriation. Financial experts in divorce proceedings often have forensic accounting backgrounds, so be sure to tap into their fraud expertise.

Clarify tax and case law

It may be unclear whether discounts for lack of control and marketability, which are common in U.S. Tax Court cases, apply in divorces. Other relevant issues that might arise when an appraiser values a business include the appropriate standard of value, the appraisal date, and local courts’ treatment of buy-sell agreements and goodwill.

While it’s necessary to look at applicable case law in the appropriate state, an understanding of legal precedent in other jurisdictions can be helpful, too. Family courts sometimes consider cases in other states — or even U.S. Tax Court cases — especially if the state hasn’t ruled on a similar case or if state case law is contradictory. The parties also might argue whether it’s appropriate to subtract built-in capital gains tax liabilities when the marital estate includes C corporation stock. In a volatile economy, parties might argue over whether the filing date or the court date is the more appropriate “as of” date for valuing stock, retirement accounts and other marital assets.

Such points of contention can slow down divorce cases and add an element of uncertainty to court-imposed settlements, especially since judges may differ in their interpretations of these issues. Often the parties are better off negotiating their own out-of-court settlements.

Rely on professional expertise

It may be tempting to perform a do-it-yourself asset appraisal in a misguided attempt to save money — but it won’t pay in the long run. Shortcuts, such as industry rules of thumb, net book value or buy-sell formulas, are likely to be found lacking.

And attempts to fraudulently hide or misrepresent assets could lead to additional legal trouble. In the end, such problems will make the original divorce action seem like a walk in the park.

Use the tried-and-true

Professional appraisers use sophisticated methods to value assets, particularly businesses. Such methods might include the adjusted book value, guideline public company, merger and acquisition, capitalization of earnings and discounted cash flow methods. These proven techniques are preferred by courts — and will lead to a better outcome for all involved.

Michael Lehner

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.