During a divorce, whether for purposes of negotiation, mediation, collaboration or litigation, the parties need to assign a value to the assets – this is called valuation. Frequently valuation of property can be easy, such as when it is a bank or retirement account as of a specific date. However, valuation of property can also be quite difficult, such as when there is a family business or other intangible assets such as investments or a pension.
Generally, if the parties cannot agree to an item’s value, and the matter goes to trial, a judge will make a decision. However, a judge frequently looks to the testimony of experts to assist in making an appropriate ruling with regards to valuation.
Valuation versus classification, what is the difference?
Valuation and classification of assets are not synonymous. Valuation should not be confused with classification of assets, such as separate or marital property. Moreover, while assets can certainly generate family income, they remain assets. In divorce matters, assets are not considered income even if they generate income (this is a different discussion when talking about alimony or child support). Classification of assets is performed as an adjunct to equitable distribution, but assigning a value to the asset is independent of its classification. In most circumstances, a dollar value needs to be assigned to every major asset (whether tangible or intangible) in play during the divorce. In most circumstances, the value that is to be assigned is called “Fair Market Value.”
What is Fair Market Value?
Fair Market Value is defined as the price a willing buyer would pay to a willing seller to purchase the asset on the open market, with neither buyer nor seller under any compulsion to complete the transaction. Obviously, this can create issues during the divorce process. Many assets, most frequently retirement benefits, are valued at hundreds of thousands of dollars, yet a willing buyer would be unable or unwilling to purchase such items. Consider in most divorces that the value of an asset is the value of a future benefit the owner will receive. Having a family business in the mix can further complicate the issues of valuation.
Are there special considerations in valuing a family business?
For example, closely held corporations, single-proprietor businesses, private companies without publicly traded stock need to be valued by experts who use different methods to place a value on the business. Many factors make these calculations complicated and subject to dispute. Moreover, emotional attachments to businesses can make these types of valuations emotionally charged since one spouse may be far more emotionally attached to the business than the other may. In some cases, part of the value of a business may be considered separate, non-marital property and the remainder of the business is considered marital property. This is frequently the case when one spouse had an established business at the time of marriage.
What are the three approaches to valuation of a business?
Although valuation of a business can be challenging, business valuation experts are trained and skilled in assigning an appropriate Fair Market Value to a business entity. There are three approaches to value any business or business interest; they are (1) the asset approach; (2) the income approach; and (3) the market approach. While there are no other approaches to value, there are various methods that an expert may consider within each of these approaches. Each approach has inherent strengths and weaknesses and some approaches provide a more reliable conclusion of value than others depending upon the individual circumstances. A skilled valuation expert will consider all three approaches; however, it is often the case that not all three approaches should be applied. For example, in an asset approach, the business valuation expert may seek to value intangible assets. The difficulty of finding reliable data to value individual intangible assets may not only be a challenging task, but also intangible asset values are frequently captured in proper application of the income and market approaches. Ultimately, it is the responsibility of the parties, and their counsel, to persuade the court (or the other expert) that his or her expert’s valuation conclusion is more reliable based upon the three approaches that are applied and the judgment exercised by each expert.
Valuing a family business can become further complicated by unique situations that require other considerations in assigning a value such as: 1) partial ownership interests — when the owning spouse owns less than the whole business; 2) minority vs. majority ownership interests — which reduces the minority owners’ control of the business; 3) a lack of marketability – which means that the shares of a closely held corporation cannot be readily sold on a public market; 4) lack of business voting rights – which may dilute a value since the owner has no voting rights for the company at all; and 5) a”key man,” who might leave the business in the event of a change of ownership.
What do I need to consider in valuing the family home during a divorce?
In general, the valuation of the family home requires an appraisal or an owner’s specific knowledge of the local housing market and value of similarly situated homes. When a divorcing couple sells the family home as part of a divorce, they often (but not always) divide the net-equity of the house. Net-equity is the market value of the home minus the balance of any mortgages and other costs associated with the sale of the home.
When a couple sells the family home as part of the divorce, they usually divide the net sales proceeds and in so doing split the cost of selling — real estate commissions and related costs — between them. However, when a court orders a home sold during a divorce, it often appoints a trustee to sell the home for the parties and the trustee divides any remaining proceeds between the parties – after the trustee deducts all the prior liens, encumbrances, and costs of sale – including the fee the trustee is entitled to collect upon sale. However, when one spouse keeps the home, these costs may not be considered in the valuation of the home (unless your attorney thinks it is wise to raise this issue).
If valuation of assets is an issue in your divorce matter, a skilled attorney is an invaluable resource. Please let me know if I can be of assistance.