Handling small businesses in divorce mediation presents several challenges and added complexity to the process. For starters, there may be other owners involved in the company, or it could have been a business passed down within a family. The value of the company under consideration for the asset division is typically the value created during the marriage. Sometimes that substantial, and sometimes there is little to no value to divide.
If you were negotiating your divorce settlement through attorneys or at trial, you would likely rely on a business valuation or possibly two competing expert reports.
Most people who choose mediation to settle their divorce choose it because they don't want to waste marital assets on the divorce itself. Thus, paying $10,000-20,000 for business valuations does not make a lot of sense.
Related post: 10 Ways to Save Money on Your Divorce
Not only does the valuation add quite a bit of cost to the process, but it can also add quite a bit of time to it. A business valuation can take several weeks to complete and requires the business to disclose a substantial amount of information. The full valuation can be overwhelming to the party running the company who likely is already exhausted as a result of the time, emotion, and cost of the divorce itself.
Remember that one of the most significant benefits of mediation is that it gives you greater control over the divorce process. In terms of business valuation, that means deciding how you will determine the value to be divided.
Many businesses do not have an asset value that is worth considering to divide assets. For example, someone who contracts their IT services may only have a computer and a phone as business assets. The revenue for their business is just their income. There would not be anything that could be sold, such as a customer list or physical equipment such as tools or vehicles. If that's the case, there's no need to have a separate value of the business beyond any cash in the bank and small assets of value the business owns.
In reality, it's often difficult to find useful comparisons for small businesses. However, there are exceptions. For example, I recently worked with a couple who owned several franchises. The franchises are commonly bought and sold, so the market multiples are well-established for those specific businesses. Because both parties were involved in the business, and both were familiar with the market for those franchises, they were comfortable agreeing on an appropriate value to use for each establishment.
If the business you're valuing is capital-intensive, it may make sense (and save you some money) to have the physical equipment valued. Let me give you an example. I recently worked on a case where one of the parties had an excavation company. The company had no ongoing projects or contracts. The vast majority of the business value was in the equipment owned by the business. After having the equipment appraised, the parties were able to agree upon a value.
There is an alternative to a comprehensive business valuation, which can help save the parties both time and money while providing a reliable third party number to use in mediation. This is the Calculation of Value Report. According to the National Association of Certified Valuation Analysts (NACVA), a Calculation Engagement occurs when the client and member agree to specific valuation approaches, methods, and the extent of selected procedures and results in a Calculated Value.
The calculation report will perform a deep dive into the financials of the company as any business valuation should. The report will be short, typically 6 – 8 pages and if conducted according to the standards of the NACVA, it will include the purpose of the report, description, ownership size, nature, restrictions, and agreements of the interest being valued as well as a calculation date and report date.
It will also include the scope of work, calculation procedures, hypothetical conditions/assumptions, and the reason for their inclusion. It will include subsequent events that are considered. It will include a statement of financial interest and whether or not the author is obligated to update the report. Finally, the valuation analyst who is responsible for providing the report will sign it.
The calculation report should show normalized financial schedules for the subject company. The owner’s compensation, as well as other balance sheet and income statement non-recurring items, should be reviewed, researched, and normalized. The company documents, including financials, tax returns, corporate records, buy-sell agreements, and other articles of incorporation, should be reviewed. An interview with the management will still need to be conducted, although they are often done remotely. The calculation report will also include any discounts for lack of control if there are other owners and discounts, possibly, for lack of liquidity.
Typically, two of the three approaches are used whether it is the Asset Approach usually using the Adjusted Net Assets Method, the Income Approach using either the Capitalization of Earnings or the Discounted Cash Flow Method and/or the Market Approach typically using the Guideline Public Company Method showing both the Seller’s Discretionary Earnings Multiple and the Revenue Multiple. The financial schedules showing the numbers will be included in the report as well as a list of the sources of information utilized to derive the calculated value.
Overall, this is a way to save time and expense while providing a calculated value of the subject company based on its historical, current, and expected financials.
If you aren't sure if a business valuation is really necessary in your case, reach out to me and let's talk. I can help you understand if there is value in the business and whether or not a full valuation is worthwhile. I can also help you brainstorm creative solutions regarding how to divide the equity in the business, if that's necessary.