Business valuation has become an important part of the legal system and especially when spouses are parting ways.  An ownership interest in a business is usually considered a marital asset in a divorce, similar to a house or other wealth.  Often, it is the one of the most significant assets in the marital estate.  The value of the business needs to be determined for equitable distribution purposes.  However, when a divorcing couple can’t come to an agreement on asset values and how to fairly distribute their assets, attorneys and the court often get involved.

It takes a particular set of skills, knowledge, education, experience and training coupled with the proper application of professional standards to properly value a business ownership interest.  A Certified Valuation Analyst (CVA) and individuals Accredited in Business Valuation (ABV) are required to adhere to professional standards of practice and meet levels of expertise their credentialling Associations deem credible.  These designees are able to review and analyze a business’ historical and current financial and other information, industry data, economic data, and market data performing complex calculations in conformity to professional standards in order to determine fair market value of a particular business ownership interest.  For those going through divorce proceeding where a business needs to be valued, hiring a properly accredited valuator is necessary to ensure an unbiased, professional standards compliant valuation is performed.

Th case of Kwak v. Bozarth (2023 Mass. App. Unpub. LEXIS 179) is a cautionary tale displaying just how detrimental not hiring an accredited business valuation professional can be. The National Association of Certified Valuators and Analysists (“NACVA”) reported on this case in the fall of 2023 as an “object lesson in the importance of providing expert analysis and testimony in business valuation.” Here’s what we learned:

• A Husband and Wife were divorcing and the Wife’s dental practice value was in dispute.
• The Wife valued the business herself, using a calculation not recognized by Accredited Standards of Practice.
• The Husband proffered a valuation expert who presented a value for the dental practice based on a recognized valuation approach: the capitalization of earnings income approach method.
• The trial court wholly rejected the Wife’s calculation, finding that the methodology employed was a not a recognized business valuation methodology.
• Husband was awarded his entitled share of the business which was five times greater than what the Wife calculated.

While it may seem like an “educated guess” or just applying a “rule of thumb” is sufficient for valuing a business in a dispute matter, that methodology will almost never holdup during legal proceedings.  As demonstrated in this case, the court rejected the wife’s valuation, favoring the husband’s expert’s analysis.

The same is true in shareholder or LLC member disputes.

Forensic Accounting in Valuing a Business

Occasionally when valuing a business, the expert valuator will encounter irregularities while digging through the business’ documents.  In these circumstances, forensic accounting is necessary to analyze and reconstruct income in order to properly determine a business’ value.  Additionally, forensic accountants look for numbers that are not as easy to find with the naked eye.  They use their accounting skills to investigate and uncover hidden assets, income, or whether someone has been skimming money from the business.  Especially in situations like divorce and business owner disputes, an individual party may be trying to hide important financial information so that person can prevent sharing the true value of the business. It’s important to include an unbiased business valuation and forensic accounting team as well as a stellar legal team when navigating divorce and business owner disputes. At Reagan FVL, our team can help with:

• Business Valuation
• Hidden Asset Searches
• Structuring Equitable Property Settlements
• Marital and Separate Property Determinations
• Suggested Marital Asset Allocations
• Cash Flow Consulting and Analysis
• Post-divorce Financial and Tax Planning

If you, or someone you know is going through a divorce or are amidst a business ownership dispute where the value of the business is in question, or even if someone is struggling to find an unbiased party to examine financial data, contact our team to learn more.