Property division is a crucial portion of your divorce. There are three key components to property division. First, all marital assets must be located and fully identified. Next, each asset must be assigned a value. Lastly, once the value has been determined, the assets are divided between the parties.
The valuation step requires complex analysis and evaluation. When the asset is a business, your highly skilled attorney and business evaluator/forensic accountant must work together to create a value. In general, the Uniform Standards of Professional Appraisal Practice are used in the valuation process.
Your attorney will present an argument to the court about valuation, and the judge will render a final decision as to the value that will be applied. Using that valuation, equitable distribution will be applied by the court as part of the divorce judgment.
Before valuation can be determined, a valuation date has to be determined. At what point in time will the value of the asset be fixed? In many cases, the date of separation or date of filing is used. In other instances, the date may be fixed at a point later in time, closer to the trial. There are benefits and detriments to all possible valuation dates, so your attorney will argue for a date that is most beneficial to your case.
Present Day Value
An essential point to keep in mind is that the valuation process is meant to determine a present-day value for the asset, as of the valuation date. All assets and businesses have the potential to be worth much more in the future. To establish a correct valuation for some assets, the process will require examining their future projected value to determine what they are worth today. This also requires due consideration of items that might not normally be considered assets, such as your personal brand, or your couple's brand.
Types of Valuation Approaches
There are three valuation approaches that can be applied to the assets in a marriage: market value approach, income-based approach, and asset-based approach. Each has its benefits and drawbacks. The type of asset may be an indication as to which approach should be utilized, but ultimately, your attorney will choose the approach that will be the most beneficial to your case.
Market Value Approach
The market value approach is perhaps the simplest. The question that is asked is, what would a willing seller pay for this asset or business from a willing buyer in an arm's length transaction in an open and unrestricted fair market? The answer to that question creates the valuation. To determine the market value of an asset, analogous comps are necessary. This is the method that real estate evaluators use to determine the value for a home or piece of property.
This method has the benefit of being the easiest and is generally straightforward and fast. However, there must be sufficient comps in a correlative position to allow a reasoned valuation to be created. If comps can't be obtained, or the comps are not similar enough, this valuation method won't be viable, which is its primary drawback. It can be challenging to locate a business in a similar industry, of comparable size, with congruent profits that has been sold in a true arm's length transaction. If your business is unique in the marketplace, it can be challenging to find any comps, let alone comps that are relevant.
The income-based valuation approach creates a present day value for the business based on the estimates of future cash flow for the business. Net or discretionary cash flow is examined. The evaluator establishes the company's income and normalizes costs, including expenses and salaries. The company's risks for moving forward are incorporated into the analysis. A capitalization rate is then utilized to create the business's value. There are several cash flow methods to consider:
- Discounted cash flow method
- Earnings capitalization method
- Multiple of discretionary earnings method
Factors that must be considered during the valuation process include:
- Revenue growth
- Future capital expenditures
- Capital requirements
- Cost drivers
- Relevant taxes
The end goal is to determine a fair value for shareholders in light of their role. This method works for a host of conditions and doesn't require comps. However, this is a subjective analysis that can be time-consuming.
In the asset-based approach, a business's value is determined by valuing all of the business’ assets and subtracting the liabilities. The value of the assets is determined by looking at their replacement value. Accounts receivables are evaluated as part of the process. This method works best for businesses that have assets such as real estate, inventory, equipment, and accounts receivable. Intangible assets (such as intellectual property or goodwill) are also included as part of the valuation process but may be challenging to accurately value with this approach. Balance sheets are examined and then adjusted in light of current market conditions. This method is generally fast and easy and often is used for capital intensive businesses. The drawback is that it does not evaluate future earnings potential.
Applying the Valuation Methods
The most successful argument about divorce assets will employ different valuation methods for different companies and assets, with the goal of either maximizing or minimizing the estimate depending on the client's position in the divorce. In addition to creating an evidence-based assessment, your attorney will present the court with an argument as to why the valuation methods that have been used are the most appropriate for that particular asset.