Business Valuation in Divorce: Qualifications and Approaches

You and your spouse have decided to divorce. As you start researching how the court might divide your property and how much you can expect to receive in alimony, you run into an issue. Your spouse owns his or her own business. Is that an asset? Is it income? Both?
The truth will depend upon what kind of business and what kind of income. So how do you figure out how a business is worth? List it on Craigslist and see what kind of offers you get? The truth is that valuing a business for a divorce is much more complicated than that.
A seasoned family law practitioner will have their preferred financial experts to use as business valuators. Most of the time, these financial experts will be more than just a Certified Public Accountant (“CPA”). In fact, there are a number of different credentials you should look for when choosing an expert to perform a business valuation. Sometimes you will see a Certified Valuation Analyst (“CVA”) or an Accredited Valuation Analyst (“AVA”). These credentials are given by the National Association of Certified Valuation Analysts. A CVA requires a valid CPA license, but both a CVA and an AVA must pass a five-hour proctored exam and a submission of a comprehensive case study and valuation report.
Next, there are Certified Business Appraisers (“CBA”). This credential is given by the Institute of Business Appraisers. To be eligible for a CBA, an individual must have a four-year college degree or 10,000 hours of active appraisal experience. Additionally, the individual must complete a number of courses as well as a six-hour exam. Finally, this requires an individual to submit two examples of their work to the Institute of Business Appraisers for committee review.
An individual may also be Accredited in Business Valuation (“ABV”). This designation is given by the American Institute of Certified Public Appraisers, and requires the individual to be a CPA, have the requisite amount of education and business experience, and pass a six-hour exam. Finally, there is the Accredited Senior Appraiser (“ASA”) designation, which is given by the American Society of Appraisers. An ASA requires the individual to have five years of full-time business valuation experience, complete a number of courses and course exams on business valuation and the Uniform Standards of Professional Appraisal Practice, and submit appraisal reports for panel review.
What a person will need for their case will depend upon what type of business is being valued and how well the business has kept records. For a very small, closely-held business with great record-keeping and few employees and other complications, likely any of these credentials would be fine. If, however, the business to be valued is large, there are missing or incomplete records, or the business is, for example, publicly-traded or suspected to be very highly valued, an individual may want to think about hiring an ASA, though many business valuators maintain many of these credentials at the same time.
You’ve chosen your business valuation expert and they get to work, eventually producing a value. Your spouse argues that they could never sell the business for that much money and that it is unfair to place that type of a value on the business. Are they right?
There are a few different types of methods experts use to value a business for a divorce, and it’s more complicated than just the price for which a business could sell. Most business will have both “tangible” and “intangible” assets. Tangible assets include things like cash in the bank, outstanding accounts receivable, inventory, and equipment like company vehicles. Valuing tangible assets is the easy part, because tangible assets generally have the most understandable value. The value of the cash in a bank account is the value of that cash. The value of a company car is how much that vehicle is worth, minus any loans.
It is the intangible assets of a business that really require an expert. Intangible assets can include things that are not readily observable, like trademarks, goodwill, and contracts. Goodwill is a term litigants will likely hear a lot when a business is involved. The “goodwill” value of a business, according to the Nevada Supreme Court in Ford v. Ford, 105 Nev. 672, 782 P.2d 1304 (1989) is the business’s reputation and the likelihood that reputation will lead to new business in the future. The Nevada Supreme Court stated that even if a business is not salable, it can still have goodwill, and that goodwill can still be community property if it was developed during a marriage.
There are three approaches business valuation experts use when determining how much a business is worth. First, there is the “asset approach.” This approach determines the value of all tangible and intangible assets, minus any liabilities.
Next, there is the “income approach.” This method involves calculating the future income stream of a business along with an anticipated rate or return or risk. This approach shows the need for a qualified valuation expert, as the expert will need to make many subjective decisions in order to determine a value under the income approach because future earnings are being predicted.
Finally, there is the “market approach.” The market approach is akin to how real estate appraisals are done in that it compares the business to similar businesses that have been sold. The market approach is perhaps the least compelling valuation method because it is often difficult to find similar business that have sold due to the many differences between businesses. Typically, a business valuation expert will use all three methods, then weigh the conclusion reached under each method to come to a final expert opinion as to the business’s value.
If you know you are going to need to do a business valuation in your divorce case, keep an eye on your deadlines. Nevada Rule of Civil Procedure 16.2, which governs divorce cases, dictates that an expert must be disclosed within 90 days after the initial financial disclosure form is required to be filed (which is 30 days after service of the complaint for divorce). The expert report must be finished and disclosed to the other attorney or party within 60 days of the close of discovery, unless the court says otherwise.
Individuals sometimes assume that they can determine a business value on their own, or are tempted to merely settle on a value in order to finish the divorce case. This is a dangerous path, because businesses are almost always valued more than the individual who owns the business believes it to be worth. If you are dealing with a divorce case involving a business that needs to be valued, it is advisable to engage the services of an experienced family law attorney, who can also hire a qualified business valuation expert.