Domestic Relations / 05.31.2019

Divorce and the Family Business (Part 2 of 3): What is It Worth?

By John Ramsey

Last week was the first in a series of three articles regarding divorce and the family business. In the first article we provided a basic introduction to identifying the type of business asset owned by either spouse. We also discussed the likely documentation that would be requested and required to understand the nature of the privately held business interest.

In this second article, the focus will be on determining what the business interest is worth. In a divorce, Ohio courts must identify all assets and determine the fair market value of those assets. Fair Market Value in the context of a spouse’s business interest is generally defined as the amount that a willing buyer would pay to a willing seller for the business interest, not being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. This definition, for divorce (and other) purposes, typically assumes hypothetical buyers and sellers are engaged in an arm’s length transaction.

Selecting an Expert

When one or both spouses own a business interest, it is critical to select a skilled business valuation expert to determine the fair market value of that interest. A valuation expert is critical in laying the foundation for determining what, if any, portion of the business is a spouse’s separate property, and thus, not subject to division in the divorce action

Based on experience, it is absolutely essential to hire an expert who is objective, fair and is someone who can provide sound reasoning for all assumptions he/she has made in determining the fair market value of the relevant business interest.

What to Expect In the Valuation

If a valuator has been hired by one or both spouses to determine the fair market value of the business interest, you can likely expect a substantial request for documents. The documents requested will typically include bank statements, business financials (balance sheets, income statements, profit and loss statements, etc.), tax returns, buy-sell agreements (if not already requested), prior business valuation reports (if any), prior loan documents, prior sale or recapitalization documents as well as other similar types of documents. Simply stated, the request is often very detailed and the responsive documents can be voluminous.

In certain circumstances, the valuator may also need to conduct interviews with various persons involved in the business. Often, the purpose of these interviews is to simply collect more detailed information about the day-to-day operations of the business or to clarify questions raised by the corporate records.

Although a potentially time-consuming process, the importance of cooperating with a valuator cannot be understated.

Timing is Everything

Particularly important in determining what documents to request, is knowing at what points in time you want to know the value of the particular business interest.

For example, if your wife came into the marriage with a 15% ownership interest in Company Y, you will first want to determine the fair market value for that 15% interest as of the date of marriage (“Time 1”). As such, you will need to have the relevant financial documentation identified above for that time period.

Next, assuming she has retained her ownership interest in the business throughout the marriage, you will want to know the value of the business interest at the time of divorce (“Time 2”). Accordingly, you will need to have the relevant financial documentation for that time period as well.

As a result, in determining what a business interest is worth in the context of a divorce, it is critical to know not only what was owned at various relevant times but also what the values of the ownership interest were at those same relevant times.

Marital versus Separate Property

As will be discussed more thoroughly in the next article, understanding the fair market value of the spouse’s business interest at various relevant times is vital to understanding what portion of that interest, if any, is considered the owning spouse’s separate property, and thus, not subject to division in the divorce proceeding.

KJK’s Domestic Relations & Family Law Practice Group can assist with all issues regarding divorce/dissolution, including issues pertaining to privately held (including family-owned) businesses. If you need assistance on these or other domestic relations matters, please contact John Ramsey at jdr@kjk.com or 216.736.7289.

 

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