Divorce proceedings are tricky enough, but when you are self-employed or a business owner, things get trickier. Knowing what common issues might arise while dividing business assets will help you understand the processes to expect and be prepared.
One of the most important issues for business owners and their spouses is the valuation of a business. The value of a business can have a significant impact on the outcome of the divorce.
During the divorce process, the court will determine the value of businesses, corporations or LLCs owned by both parties, regardless if they were established before or during the marriage. The court will use the business valuation to estimate each spouse’s total income, which then is used to establish child and spousal support.
Problems With Business Valuation Methods
The valuation process can be complicated. Challenges and disputes may arise over the methods used in valuing business interests.
In an article for FamilyLawyerMagazine.com, two valuators discussed a high-stakes case. In question was the husband’s one percent partnership interest in a lucrative, privately-held professional practice. The valuators used a discounted cash-flow method to estimate the subject partnership interest. Several experts for both the plaintiff and defendant came up with varying values for the partnership interest that ranged from $10 million to about $200 million.
Two main issues led to this result, which complicated the divorce process. The first issue was deciding whether “to normalize the stream of cash flows forecasted to be received in the future by the husband from the Partnership by subtracting from it an annual reasonable compensation amount.” The second issue was deciding “the appropriate discount rate to be applied to the normalized stream of cash flows after the subtraction of a reasonable compensation amount,” according to the article.
The valuators used this example to offer two pieces of advice. First, they wrote, both parties should hire experts of equal caliber to obtain reliable information using the best approach and methods; second, the most qualified experts should be hired as the case starts, because hiring extra experts isn’t always possible during the trial or appeals process.
How business valuations can affect spousal support
Double dipping, or double counting, is another common issue. Double dipping refers to counting income twice when determining spousal support. It has been argued that if professional practices are valued by capitalizing their future income and some of that income also is designated for spousal support, then the court is effectively counting the same income twice when calculating spousal support.
In Michigan there are no set formulas for valuing a business. The objective in all situations is to obtain a result that reflects the true value of a business if it were to be sold in the open market. Similarly, Michigan courts have avoided taking a hard line stance on whether double-dipping is appropriate. Each case is decided on a case-by-case basis.
Because there can be so much variation in how a business is valued in a divorce, divorcing individuals should consider retaining attorneys who are skilled in business valuations.