valuations, business appraisals, dividing a business in divorce
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 financially disasterous.
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 representation call
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