Divorce is an unfortunate end to about 2 percent of marriages each year. When the assets of one or both spouses include a family business, the proceedings get more complicated. The value of a closely held business and the owner’s spendable cash flow from the business are two of the more heavily contested matters in divorces.
“It’s not unusual for the spouses to have drastically different ideas on what the business is worth and how much cash it generates,” says Robert Evans, a senior manager at Clarus Partners. “Many times, the non-operating spouse knows little about the finances of the business, but believes it is very profitable and valuable. And in a divorce usually one spouse wants a low value for the business and the other spouse wants a high value.”
Smart Business spoke with Evans about divorce and business valuations and how to find an accountant who can help, rather than hurt the process.
What makes someone the right accountant to deal with a business owner’s divorce?
The right accountant is an expert who holds an accreditation in business valuation such as an Accredited in Business Valuation (ABV) or Certified Valuation Analyst (CVA) from a recognized certification organization. Only about 1 percent of CPAs hold such designations — those who have completed specialized training, met minimum experience requirements, passed examinations and maintain their skills through specialized continuing education.
Valuations prepared by non-accredited accountants that are submitted to a court may be inadmissible.
Once the expertise requirement is satisfied, the next important factor is whether the accountant can simplify the information and present it in a way that non-accountants can understand. A business owner’s time is valuable, and attorneys and trials are expensive. An accountant who can calculate and document a reasonable value, who can then effectively explain to others why that value is reasonable, and who can defend his or her methods and conclusions can go a long way toward agreeing on a value rather than litigating it.
What is the accountant’s responsibility?
The attorney usually hires the accountant. He or she determines the nature of the work needed and gets the approval of the client to retain the expert. Among the several reports and tasks that may be requested by the attorney is a business valuation, which is a formal document that describes the entity and the ownership interest being valued. It also discusses the business’s economic environment as of the valuation date, includes historical and sometimes projected financial statements, analyzes the financial statements in detail, adjusts the financial statements as necessary, and then values the entity. As a part of this process, the owner’s compensation and perks are analyzed and possibly adjusted to a market value.
For some purposes, net book value or a rule of thumb multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) is acceptable, but these are not acceptable methods for a business valuation in a divorce proceeding.
Why is it advisable to bring in a specialist accountant?
Often the family business is the most valuable marital asset. In an attempt to pay legal and accounting fees, equalize the division of property and provide spousal and child support, the attorneys or the court may rely on the family business to provide more than it can reasonably give and potentially harm the business from either a cash flow or a credit standpoint. Companies need cash to purchase assets and to fund growth and may have loan covenants that they must meet. Here’s where the credentials and the communication abilities of the accountant can be used to show how much the business can give and help protect the business.
Sometimes the business is both separate property and martial property. The accountant can work with the attorney to make the necessary calculations to properly allocate the value between separate property and marital property.
Accountants who are experts in divorce can bring clarity to the numbers and help protect business owners and their businesses during a stressful time.
Insights Accounting is brought to you by Clarus Partners