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Evaluating a Business or Professional Practice in Divorce

Divorces often times present the issue of the value of a Family business. The departing spouse often times hopes to value the business based upon future capabilities?

From my experience, the parties are together on valuation if a buyer is interested in purchasing the business. However, if one party wishes to retain the business its seems that the departing spouse (the one that will not stay with and run the business) thinks of value in terms of the future prospects possessed by the business; while the spouse retaining the business thinks of value based on the worst case business scenario for the future. Often times, the departing wife will assert, that when the next "up economic cycle" hits, the business "is going to be worth lots of money."

The valuation standard is the "fair market value" which gets rather clouded by the emotions and financial goals of the parties involved in a divorce action. Its further complicated by the nature of the business and what the going market is for that particular type of business.

If the business is substantial an evaluation expert is often times hired to offer his professional opinion. The threshold step in determining the value of a business is to look at the components of the business such as the:

  • Fixed assets
  • Accounts receivable
  • Work in progress
  • Goodwill
  • Liabilities

After there has been a determination of the above mentioned factors evaluators look to determine if the business generates more income than the person operating the business would earn outside of the business. For example Medical practices that generate an income level similar to the amount of the professional would earn if employed tend to not have much value beyond the fixed assets themselves. On the other hand Chiropractic practices which have a lot of patient goodwill loyalties tend to have a better market value in many cases than a general Medical practice dependant on the patients referred from the managed care system so prevalent in San Diego county. In similar manner, it has been my experience that due to client loyalty factors most accounting practices are worth more than most general law practices.

Due to these and other variables our practice strongly urges anyone contemplating a divorce involving an interest in a family business to obtain a professional consultation on value approach applicable to that particular business or professional practice.

So, how do the professionals finally define fair market value? According to the Glossary of Terms was jointly developed by representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Appraisers, the Institute of Business Appraisers, and the National Association of Certified Valuation Analysts, the definition of the term fair market value is as follows:

The price, expressed in terms of cash equivalents, at which a property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy nor to sell, and when both have reasonable knowledge of the relevant facts.

There is no substitute for a good professional opinion in this area.

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