By David H. Goodman MBA, CPA/ABV/CFF, CVA
In a divorce one of the parties may be self-employed or own a business interest. Often there is a question of whether the business needs to be valued? The business owner may tell their spouse, “the business is worthless … don’t waste your money.” Or a proposal may be on the table to trade the business for the marital home (“house for business” value). The lawyer suggests getting the business valued and then the parties find out it will cost $5,000 – $15,000. Too often one of the parties will not want to pay for the business to be valued. As a result money is left on the table.
Let’s look at a case.
Mary’s husband George has a plumbing business – JT Plumbing. The business consists of the husband, a van with tools and equipment, a business name (not the husband’s) and a plumber’s helper. Her husband told Mary to not value the business … “it has no value.” Mary goes ahead with having the business valued. It cost her $7,500. The business valuation came back with a value of $25,000 and that her husband was making $12,000 more per year than his financial statement showed. Was it worth it?
Mary received 50% of the value of the business – $12,500. Her cost was $7,500 (assuming the husband did not pay 50% of the cost of the valuation). Mary netted an additional $5,000 after paying the cost of the valuation. This represented a 40% return on Mary’s investment.
Additionally, Mary received 30% of the additional $12,000 in income in support – $3,600 for 10 years. Had Mary kept her $7,500 in the bank the most she might earn per year on this is 1.5% per year or $112.50 per year.
Clearly Mary benefited by having the business valued.
Here’s another case.
Sandy was thinking of agreeing to a “house for business” swap. The marital home had equity of $250,000. Sandy had the business valued for $12,000 and the valuation was $190,000… $60,000 less than the equity value of the marital home. Sandy would have overpaid $30,000 in the property settlement had the business not been valued.
Not all businesses will have value or have overestimated values, nor will there always be understated income. What are some things to consider in deciding should the business be valued?
- Does the business have high value assets such as construction equipment, vehicles, or other equipment?
- Have assets been expensed in the year of purchase to take advantage of tax laws?
- Does the business own land, buildings, or other appreciating assets?
- Does the business support your lifestyle?
- Do you have concerns over the accuracy of the business’ tax returns or financial statements?
- Does the business have excess income after deducting reasonable compensation?
- What percent interest is owned?
- To what extent is the business income attributable to the personal goodwill of the owner?Personal goodwill means that the business attributable to the owner’s unique skills, relationships, and reputation. It is not transferable to another person. For example, a skilled reconstructive dentist may have a reputation that is not transferable to any other dentist. On the other hand, general dentistry practices are frequently sold.
- How large is the business? The greater the sales of a business and the more employees a business has, the greater the likelihood that the business has value.
The best way to determine if you should have your business valued is to speak with a qualified expert in business valuation.
David Goodman is a certified public accountant specializing in business valuation and litigation support. Mr. Goodman is trained in collaborative practice and is a qualified financial neutral. Mr. Goodman is employed by Gosule, Butkus & Jesson, LLP, Certified Public Accountants. Gosule, Butkus & Jesson, LLP is a full service accounting firm which also provides personal financial planning and wealth management services through its affiliate, Mainsail Advisors Services, LLC.