In cases where both spouses are shareholders or partners and one buys out the other through the divorce settlement, this usually results in no income tax ramifications. Your attorneys need to make sure that no language in the agreement results in a tax liability to the spouse who is selling his or his interest in the business to the spouse. Ideally, an accountant representing each spouse should meet with an accountant for the business to structure the transition of business ownership, in order to assure no disruption to day-to-day operations and yet protect the interest of both spouses.
Choosing an Appraiser
Choose an expert business appraiser. Finding a true expert is more difficult that you might think. Business valuation is a relatively new profession. Many top business appraisers estimate that a very high percentage of business appraisers produce incompetent work, even many that have a certification in business valuation.
Choosing a true expert is almost always far more important that selecting someone with experience in the company’s particular industry. You will be much safer if you start the search by looking for appraisers who hold either the Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA) in business valuation credentials. Earning either of these credentials requires the applicant to (i) pass a highly technical exam and (ii) submit appraisal reports proving that they can perform appraisals competently. The process is rigorous and the pass rate is low. Other appraisal certifications exist. They may look good on paper, but they lack the rigorous requirements that a CBA or ASA appraiser must meet. Look for a CBA or ASA appraiser at these organizations:
While the interests of the family and the business must be considered, the goal is to keep the business in operation with as little divorce-inflicted damage as possible. A competent appraisal is an absolute must, since the value provided by the business’s CPA or by an incompetent or dishonest appraiser could be extremely misleading. Your attorney plays a key role in coordinating the appraisal and business settlement with other issues in the divorce. Additionally, a financial planner (CFP) trained in divorce financial issues can illustrate the outcome of the proposed settlement with tables and graphs, assisting both spouses to see the long-range implications.
Valuing (“appraising”) a business is a very complex task, requiring the assistance of a professional business appraiser. The appraiser must be skilled in identifying the relevant information and applying the appropriate valuation methods. The relevant information will include both quantitative (such as from financial statements and tax returns) and qualitative information. The appraiser must have a thorough understanding of the business.
The appraiser selects appropriate valuation methods based upon such factors as the characteristics of the subject business and the availability of relevant information. All valuation methods fall within three categories (“valuation approaches”). These are: the Market Approach, the Income Approach, and the Asset Approach.
Market Approach to Appraisal
The Market Approach estimates the business value by using one or more methods that compares the subject business to similar one that has been sold. The Income Approach estimates the value by one or more methods that converts expected economic benefits (such as profits or cash flows) into value. The Asset Approach estimates the value by one or more methods based on the values of the assets and liabilities of the business. These assets include both tangible and intangible assets.
To value most private businesses, the skilled appraiser will use one or more methods from the Income Approach and the Market Approach. At least two methods are preferable, since business valuation is not an exact science and does require professional judgment. While the appraiser selects from numerous methods, please note that book value (the assets minus the liabilities on the balance sheet) is not a valuation method.
Most skilled business appraisers offer more than one level of appraisal service. The price of this typically ranges from roughly $3,000 to $12,000 or more. The price largely depends on the business itself and the level of appraisal services (amount of detail in the analysis and the report) that the client selects. Talking to a professional business appraiser early on in the divorce process about the different options can save money and increase peace of mind.
Separate Appraisals for Contested Divorce
If there is a contested divorce, spouses often obtain separate appraisals. A significant problem is that many appraisers who value businesses for divorce slant the results to favor their clients. While this behavior is absolutely wrong (the courts require expert opinions to be “independent”) many appraisers violate this requirement. Fighting this out in court can increase the cost of divorce tremendously. If the divorce is “collaborative“, the couple uses only one appraiser. That appraiser works for the couple and is far more likely to produce a fair, independent valuation. This can save a lot of money and help yield a result that both parties feel comfortable with.
Treatment of Goodwill in Appraisal
The treatment of the business’ “goodwill” value presents appraisal complexities and can have huge effects on the outcome for each party. Goodwill value is essentially the total value of the business minus the total value of the company’s tangible assets. Goodwill is sometimes called “blue sky.” Texas courts often require that the value of business goodwill be split into two types for divorce purposes: “personal goodwill” (sometimes called “professional goodwill”) and “enterprise goodwill”.
Personal/professional goodwill is the portion of goodwill that is directly associated with the person running or otherwise working in the business. Texas courts hold that this part of the business’ goodwill is not marital property subject to division between the parties. It is viewed as going with the individual person. The enterprise goodwill is attached to the business itself, even if the individual were to leave the company. Texas courts typically treat enterprise goodwill as marital property that is subject to division between the parties.
In order to save money when employing an appraiser, organize your documents and provide a full set to your own lawyer and business appraiser, as well as to the spouse’s.