Divorcing in a Down Economy: How to reach a fair settlement on Business Valuation
Friday, March 12th, 2010
Businesses are Marital Property
If you are married in Colorado and you or your spouse own a business, that business is all or in part marital property. If the business was opened during the marriage it is all marital property. It does not matter if your name is listed as an owner or not.
Business Valuation is often a Difficult Task
One of the more difficult parts of a divorce process is to place a monetary value on the marital business for purposes of dividing the business between the parties. This is called the Business Valuation Process. Experts typically need to be hired to accomplish this task and, depending on the size, type and level of complexity of the business, it can become a large, difficult and expensive project.
The recent implosion of the US and world financial markets and the demise of the real estate bubble, have caused a recession that has affected most businesses in the US. This has caused a new problem for valuing businesses for the purposes of divorce.
Past Business Valuation Techniques often don't fit in Today's Economic Enviroment
In the past, Business Valuations have used techniques that are based on the presumption that the historical performance of the business is a good indicator of the future trajectory of that business. Fundamentally, the mathematical models assume incremental improvement over time. Typically, the evaluator will look at the last five years of the business to determine the present value. Even if the current year shows a lower profit level, it will be factored in with the prior four years. The result may be a valuation that is out of sync with the realities of what the recession has done to the present and future revenue forecasts for your business.
In today's business climate, it is necessary to find ways to craft an equitable division of a business with the uncertainty of the business environment in mind. Coming to a bottom line figure to use for division may produce an unfair result on either side. On the one hand, the business could be valued too high because the valuation is based on past years and the person running the business has to pay out, to the other spouse, a large amount that is inconsistent with the current conditions and possible future of the business. On the other hand, the business could be in dire straits at the time of the divorce and therefore valued low, yet have a business rebound in one to three years. This leaves the spouse who did not run the business in a position of getting too small a value because he or she just happened to divorce during a recession slump. We are just not as sure these days what the future will bring.
Flexible Solutions for Today's Economy
One solution being used by family attorneys and business evaluators these days is to look outside the box at more flexible solutions. You have to tap into more complex solutions more often used when a business partnership or other entity is dissolving or when there is a buy out of one of the owners. Some solutions that are being looked at are Earn Out Options, Liquidating Events, Stock Sharing Provisions and more.
Without getting into the complexities of corporate law, the bottom line here is that you have to craft a solution that can be flexible, at least into the near future of the business. If you reach a bottom line figure and leave it at that, you may be setting this couple up to have to go back to court time and again as business conditions change. Also, if the business soars back to health in short order following a low valuation settlement number, you might leave the non-business spouse without recourse.
The Need for Protective Provisions and Professional Oversight
In order to have flexibility built in to the separation agreement, there is probably going to be a need for a professional to have some oversight over watching the business results over time and key business changes to assure that there is no "funny business" going on with accounting to skew the numbers as you move forward. There may also be a need for business oriented provisions to be placed in the settlement agreement to assure that the non-business spouse's interest in the business is protected into the future outlined in the agreement. Maintenance/Alimony may have to go to a sliding scale to avoid the attorneys fees it would take to go back to court over and over as the business re-stabilizes. There are a number of avenues to take for overseeing the future of the business. These avenues can run from working together with a financial expert in periodic review meetings to mediation or to working with a Special Master.
Consider Collaborative and Creative Solutions
The need for flexibility in the division of business interests needs to be considered in today's business climate when contemplating a divorce. Creating and maintaining a collaborative atmosphere to come up with a flexible solution is best given the lack of stability in today's business environment. The more creative the couple is willing to be in problem solving the uncertainty of the business's future the more likely they can come to a result that is equitable.
Every business and business sector is unique. You will need to work with your attorney and the appropriate experts to come up with a solution for business valuation in your particular case. There are still cases where a bottom line value can be reached, but in today's economy it is wise to look into flexible solutions as an option.
If you are married in Colorado and you or your spouse own a business, that business is all or in part marital property. If the business was opened during the marriage it is all marital property. It does not matter if your name is listed as an owner or not.
Business Valuation is often a Difficult Task
One of the more difficult parts of a divorce process is to place a monetary value on the marital business for purposes of dividing the business between the parties. This is called the Business Valuation Process. Experts typically need to be hired to accomplish this task and, depending on the size, type and level of complexity of the business, it can become a large, difficult and expensive project.
The recent implosion of the US and world financial markets and the demise of the real estate bubble, have caused a recession that has affected most businesses in the US. This has caused a new problem for valuing businesses for the purposes of divorce.
Past Business Valuation Techniques often don't fit in Today's Economic Enviroment
In the past, Business Valuations have used techniques that are based on the presumption that the historical performance of the business is a good indicator of the future trajectory of that business. Fundamentally, the mathematical models assume incremental improvement over time. Typically, the evaluator will look at the last five years of the business to determine the present value. Even if the current year shows a lower profit level, it will be factored in with the prior four years. The result may be a valuation that is out of sync with the realities of what the recession has done to the present and future revenue forecasts for your business.
In today's business climate, it is necessary to find ways to craft an equitable division of a business with the uncertainty of the business environment in mind. Coming to a bottom line figure to use for division may produce an unfair result on either side. On the one hand, the business could be valued too high because the valuation is based on past years and the person running the business has to pay out, to the other spouse, a large amount that is inconsistent with the current conditions and possible future of the business. On the other hand, the business could be in dire straits at the time of the divorce and therefore valued low, yet have a business rebound in one to three years. This leaves the spouse who did not run the business in a position of getting too small a value because he or she just happened to divorce during a recession slump. We are just not as sure these days what the future will bring.
Flexible Solutions for Today's Economy
One solution being used by family attorneys and business evaluators these days is to look outside the box at more flexible solutions. You have to tap into more complex solutions more often used when a business partnership or other entity is dissolving or when there is a buy out of one of the owners. Some solutions that are being looked at are Earn Out Options, Liquidating Events, Stock Sharing Provisions and more.
Without getting into the complexities of corporate law, the bottom line here is that you have to craft a solution that can be flexible, at least into the near future of the business. If you reach a bottom line figure and leave it at that, you may be setting this couple up to have to go back to court time and again as business conditions change. Also, if the business soars back to health in short order following a low valuation settlement number, you might leave the non-business spouse without recourse.
The Need for Protective Provisions and Professional Oversight
In order to have flexibility built in to the separation agreement, there is probably going to be a need for a professional to have some oversight over watching the business results over time and key business changes to assure that there is no "funny business" going on with accounting to skew the numbers as you move forward. There may also be a need for business oriented provisions to be placed in the settlement agreement to assure that the non-business spouse's interest in the business is protected into the future outlined in the agreement. Maintenance/Alimony may have to go to a sliding scale to avoid the attorneys fees it would take to go back to court over and over as the business re-stabilizes. There are a number of avenues to take for overseeing the future of the business. These avenues can run from working together with a financial expert in periodic review meetings to mediation or to working with a Special Master.
Consider Collaborative and Creative Solutions
The need for flexibility in the division of business interests needs to be considered in today's business climate when contemplating a divorce. Creating and maintaining a collaborative atmosphere to come up with a flexible solution is best given the lack of stability in today's business environment. The more creative the couple is willing to be in problem solving the uncertainty of the business's future the more likely they can come to a result that is equitable.
Every business and business sector is unique. You will need to work with your attorney and the appropriate experts to come up with a solution for business valuation in your particular case. There are still cases where a bottom line value can be reached, but in today's economy it is wise to look into flexible solutions as an option.
