Hello. I am a Brooklyn, New York City Divorce attorney. I have handled multiple cases that involved the valuation of a business in a divorce. This article will explain the procedure of valuing a business and the common issues that arise.
In a divorce where a business is involved if the two parties can’t agree to the value of the business an expert will need to be hired (usually a CPA with extensive experience in valuing businesses). Both parties will agree upon this expert. His appraisal report and his testimony about his methods and procedures will be evidence if the case goes to trial. If either party doesn’t agree with the report the will have the right to hire an independent expert of their own choosing to contest the findings. This can become very costly.
What your spouse is entitled regarding the business takes into account when the business was acquired and whether it is marital property. If the business was acquired before the marriage then the next question is how much did the business appreciate during the marriage and whether your spouse contributed to this appreciation? If the business was acquired during the marriage it will be considered marital property. The Court will value the business from the date of the marriage to the date the divorce was filed, this is called the “valuation date.”
The expert will consider many factors to determine the value of the business as of the valuation date. The court will consider the company’s past performance as well as future events that are known to the business at the time of valuation. For example, if your business was shut down because of Covid before the divorce was filed this can be seen as a known event that will affect the appraiser’s evaluation of the business.
The Court however is not allowed to speculate about the future performance of the business post valuation date. This means that unless there is a known future event at the time of valuation, like the Covid epidemic in the prior example, then the Court can’t consider the company’s performance after the valuation date, even if there is a steep decline in revenue. A party in this position however can argue that it is not equitable (the distribution of property in a divorce is called “equitable distribution) for the business be valued at the commencement of the divorce and that it should be valued as of the date of trial. So the valuation date is very important. It is important to note that business owners have an incentive to decrease the paper value of their business once a divorce is filed. Therefore the business may look significantly different at the time of trial and Courts are generally pretty aware of this tactic.
There are three methods for determining value of a business in a New York divorce: a. The asset approach; b. The income approach and; c. market approach.
The asset approach values a business based upon the total of its assets and liabilities. This is generally done for real estate companies. The income approach determines the value of the business based upon its operating income after liabilities are taken into consideration. This can often be contentious in situations where the person who ran the business had the business pay for their personal expenses but deducted it as a business expense thus reducing their income. An expert can spot this and will come up with his own value after removing the personal expenses from the equation. The final approach is the market approach. Here the expert will determine what the fair market value of the business would be if sold on the market. This approach is used less than the other two.
A business owner may also have an incentive to hide assets or overstate expenses in a divorce proceeding. Although there are many ways to hide assets an experienced divorce attorney can get to the bottom of a business owner’s true financial situation.
In hiding assets some individuals refuse to disclose or forget to disclose accounts in their name maybe in other states or in offshore accounts. A business owner can collect cash so it doesn’t show up as income. Sometimes phony loans or debts are created. Checks can be made out to phony employees and later void the checks to show additional business expense.
In order to cut through the bull an experienced divorce lawyer will scrutinize the other party’s tax returns tracing income received. Discovery demands, interrogatories and depositions can be used to get to the truth. A court order can be obtained forcing a spouse to sign an authorization that will allow you to search for undisclosed assets in his or her name. The party’s lifestyle can be analyzed to show that they are living well above their stated means, which means they must have unreported income, otherwise they would not be able to live the way they do. Subpoenas can be issued as well. Finally a forensic examination can be utilized to discover unreported assets.
Remember the law of equitable distribution is involved in the valuation of a business. Just because you are married it doesn’t mean that your spouse is entitled to 50% of your business. An experienced New York attorney will know the law and factors of the law apply to your case. In order to determine equitable distribution the court must consider:
- The income of the parties at the time of the marriage and at the time of the commencement of the action. DRL 236 B(5)(d)(1)
- The duration of the marriage and the age and health of both parties. DRL 236 B(5)(d)(2)
- The need of a custodial parent to occupy or own the marital residence and to use or own its household effects. DRL 236 B(5)(d)(3)
- The loss of inheritance and pension rights upon dissolution of the marriage as of the date of dissolution. DRL 236 B(5)(d)(4)
- The loss of health insurance benefits upon dissolution of the marriage. DRL 236 B(5)(d)(5)
- Any award of maintenance under subdivision six of this part. DRL 236 B(5)(d)(6)
- Any equitable claim to, interest in, or direct or indirect contribution made to the acquisition of such marital property by the party not having title, including joint efforts or expenditures and contributions and services as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party. The court shall not consider as marital property subject to distribution the value of a spouse’s enhanced earning capacity arising from a license, degree, celebrity goodwill, or career enhancement. However, in arriving at an equitable division of marital property, the court shall consider the direct or indirect contributions to the development during the marriage of the enhanced earning capacity of the other spouse. DRL 236 B(5)(d)(7)
- The liquid or non-liquid character of all marital property; DRL 236 B(5)(d)(8)
- Probable future financial circumstances of each party. DRL 236 B(5)(d)(9)
- The impossibility or difficulty of evaluating any component asset or any interest in a business, corporation or profession, and the economic desirability of retaining such asset or interest intact and free from any claim or interference by the other party; DRL 236 B(5)(d)(10)
- Tax consequences to each party. DRL 236 B(5)(d)(11)
- The wasteful dissipation of assets by either spouse; DRL 236 B(5)(d)(12)
- Any transfer or encumbrance made in contemplation of a matrimonial action without fair consideration; DRL 236 B(5)(d)(13)
- Any other factor which the court shall expressly find to be just and proper. DRL 236 B(5)(d)(14)
The Court has huge discretion in determining equitable distribution as long as they consider the above factors. In valuing a business the Court will take the expert’s report and the enumerated factors above into consideration. It is up to your attorney to point out the statutory factors that apply in your case and convince the judge that your position is the more equitable distribution of the business.
If you have questions about appeasing a business during a divorce, please contact the Gilmer Law Firm, PLLC at 718-864-2011.