To determine the fair division of assets in divorce cases, both parties must have an understanding of the value of the assets subject to equitable distribution. The value of certain assets can be obtained with relative ease. For example, the value of a bank account or brokerage account can be determined by reviewing statements for the account. However, when one spouse owns a business or has an ownership interest in a business, determining the value is far more complicated.
Under New Jersey law, businesses are valued for divorce purposes differently than they would be valued if the business owner were selling the business to a third party based on an arms-length transaction. The reason for this is that the owning party is not actually selling the business in the case of a divorce. Under the circumstances, the goal of the valuation in divorce cases is to determine the fair value of the business to the “holder” (i.e., the owner of business), as opposed to the fair market value of the business.
Methodologies for valuing a business for divorce purposes can vary significantly depending on the facts and circumstances of the case as well as the nature of the business itself. The approach for valuing a relatively small company can greatly differ from the approach utilized to value a large company. Similarly, the approach to valuing a publicly traded company will likely differ from the approach utilized to value a closely held corporation.
One of the most common approaches to valuing a business in a divorce case is the capitalization of earnings method. Under this standard, the value of the business is determined by looking at past earnings in order to project future earnings and then determining the present value of those future earnings. While projecting future earnings doesn’t require a crystal ball, it can indeed be a risky undertaking. For example, if Lehman Brothers was valued in 2007 one would have concluded that the business was of great value based on its past 5 years of performance. However, by September 2008 and the market crash, the business became essentially worthless. While Lehman Brothers is a radical example of the risks inherent in attempting to value a business, it demonstrates that valuation is indeed not a science and that two (2) experts can have vastly different opinions on value.
In divorce cases where one party has an ownership interest in a business, retaining an attorney who understands the subjective nature of business valuations is critical. The attorney must work in tandem with knowledgeable forensic accountants in order to appropriately value a business for divorce purposes. As a business can be the most significant asset in a divorce case, choosing the right attorney and accounting team from the start is of paramount importance.