Valuing a Business in Divorce
Valuing a Business in
By Maury D. Beaulier, Esq.
In today's booming economy, it is
more and more common for divorcing couples to struggle with the valuation and
division of a small business as part of the divorce process. Remember, even if
the ownership interest is in the name of only one spouse, it may be marital if
it was acquired, improved upon, or financed during the marriage.
Often, only one marriage partner is actively involved in the business. That
partner will generally underestimate the value of the business or business
interest as part of the divorce process. The other party may not seek an
independent appraisal under the misguided belief that the appraisal will cost
too much electing, instead, to rely on the estimate of their spouse. This can be
This risk was illustrated clearly in a much publicized case in Hennepin County
District Court, Minneapolis, Minnesota. In that case, Debra Sax married husband
Paul Taunton in 1994. Taunton was the owner of a company called Athletic
Fitters, Inc. (AFI). During the marriage, Taunton is alleged to have repeatedly
told Sax that AFI was worth $6 million and that his income was between $250,000
and $300,000 per year.
In 1997, Taunton filed for divorce and the parties decided to get the divorce
proceedings over with as soon as possible. In that proceeding, Taunton stated
that his income was $250,000 and that AFI was worth $6 Million. Relying on those
representations, Sax agreed to a property division and the divorce decree was
entered in October of 1997. Fast, simple and civil, right?
Less than four months after the divorce, AFI was sold for $30 million, five
times more than the Company was worth. Moreover, investigation after the divorce
revealed that Taunton's Annual income was not $250,000 to $300,000 but ranged
from $900,000 in 1994 to $4 million in 1996. Sax subsequently brought a lawsuit
against Taunton's divorce attorney, Kathleen Picotte Newman, arguing that the
attorney misrepresented the facts since it was her firm, Larkin, Hoffman, Daly &
Lindgren, that negotiated the business sale. Though the case has yet to be
determined, it is generally believed that Sax is unlikely to succeed in her
lawsuit since she elected not to investigate the facts.
For that reason, business valuations are cost effective and even essential as
part of divorce proceedings. Cutting corners to save on the cost of an appraisal
may wind up costing you a significant amount more. Appraisers generally produce
written reports which detail the analysis and steps taken to reach a value
conclusion. Even in mediated divorces, appraisals are important. The parties may
select a joint appraiser which helps reduce the costs associated with the
appraisal for both parties.
The Institute of Business Appraisers (IBA) and the American Society of
Appraisers (ASA) have also issued standards for valuing businesses. Although
each business appraisal may require an appraiser to make certain assumptions
about the business or industry, each appraiser follows a similar general
procedure applying professionally accepted standards. This has decreased the
variability valuations. In short, if two appraisers review the same business,
they may arrive at different values, but the gap between their appraisals should
be fairly narrow. As a result, a professional appraisal would eliminate the
inequitable result that Ms. Sax encountered in her divorce.
Regardless of the size of the business, it is critically important that you
retain an attorney experienced in complex property issues. An experienced
attorney will work closely with the qualified appraiser to arrive at a fair
valuation of the business and provide advice on the legal consequences.