Business Valuation in the Collaborative Process

Ownership of a closely held business can complicate a divorce, especially when the couple must hire a business valuation professional. By cooperatively obtaining a business valuation in a Collaborative Divorce, both spouses can become better educated about the valuation process which will help them better understand how the valuation was derived. 

In a Collaborative Divorce, the couple will jointly engage a valuation expert who is not allied to either spouse. The business valuation expert becomes part of the Collaborative team and must agree to the terms of the Collaborative Participation Agreement, meaning they will work in a cooperative fashion with both spouses, rather than taking an adversarial position, as is often the case in traditional divorces.

Business valuation in a Collaborative Divorce begins with information gathering. Recognizing one spouse often has superior knowledge of the business and its finances, the Collaborative Process, allows both spouses and their attorneys to be part of the information-gathering discussion to ensure that everyone can ask questions to ensure they understand all the information. This puts everyone on the same page so one spouse does not feel in the dark.

A business valuator will request financial records from the company such as: annual and year-to-date financial statements; tax returns; lists of assets, accounts receivable and payables; depreciation schedules; major contracts; and documents showing ownership of the company.  A site visit is often necessary. The business valuator will also look at any personal expenses paid by the business, owner compensation, and depreciation. In a Collaborative Divorce, all of this information is shared with both spouses.

Business valuations are done through three approaches: 1. Asset – What is the value of what the company owns? 2. Income – How much does the company earn each year?  3.  Market – What have similar businesses sold for? The valuator will determine if there is any “personal goodwill,” i.e., the value attributable to an individual's reputation, expertise, skill, knowledge, or relationships. 

Once the expert has made initial calculations, they will present their findings to the Collaborative Team. The expert will explain where their information came from, what assumptions they used and why, and what discounts they used and why. The team will then discuss these items, along with any initial questions they may have, and may run different scenarios with the expert to show what happens to the valuation when those changes.

In traditional litigation, the couple frequently must conduct expensive “discovery,” including depositions to challenge the expert’s (or multiple experts’) opinion(s) and to obtain records. This approach often results in distrust and increased cost.  In traditional litigation, obtaining a business value can be a long, frustrating ordeal.

The Collaborative Process promotes a better understanding of the valuation process by both spouses and their lawyers, allowing them to feel informed, and to understand the information and the valuation number fully. If one or both spouses feel the valuation given to the business is inaccurate, they can still agree on another number if they choose.

Conducting a business valuation through the Collaborative Process allows both spouses to be informed, involved, and comfortable with the final value they choose to use.