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| Valuing a Business in Divorce |
By Maury D. Beaulier, Esquire
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In today's booming economy, it is more and more common for divorcing
couples to struggle with the valuation and division of a small business as part
of the divorce process. Remember, even if the ownership interest is in the
name of only one spouse, it may be marital if it was acquired, improved
upon, or financed during the marriage.
Often, only one marriage partner is actively involved in the business. That
partner will generally underestimate the value of the business or business
interest as part of the divorce process. The other party may not seek an
independent appraisal under the misguided belief that the appraisal will cost
too much electing, instead, to rely on the estimate of their spouse. This can
be financially disasterous.
This risk was illustrated clearly in a much publicized case in Hennepin
County District Court, Minneapolis, Minnesota. In that case, Debra Sax
married husband Paul Taunton in 1994. Taunton was the owner of a
company called Athletic Fitters, Inc. (AFI). During the marriage, Taunton is
alleged to have repeatedly told Sax that AFI was worth $6 million and that
his income was between $250,000 and $300,000 per year.
In 1997, Taunton filed for divorce and the parties decided to get the
divorce proceedings over with as soon as possible. In that proceeding,
Taunton stated that his income was $250,000 and that AFI was worth $6
Million. Relying on those representations, Sax agreed to a property division
and the divorce decree was entered in October of 1997. Fast, simple and
civil, right?
Wrong!
Less than four months after the divorce, AFI was sold for $30 million, five
times more than the Company was worth. Moreover, investigation after the
divorce revealed that Taunton's Annual income was not $250,000 to
$300,000 but ranged from $900,000 in 1994 to $4 million in 1996. Sax
subsequently brought a lawsuit against Taunton's divorce attorney, Kathleen
Picotte Newman, arguing that the attorney misrepresented the facts since it
was her firm, Larkin, Hoffman, Daly & Lindgren, that negotiated the
business sale. Though the case has yet to be determined, it is generally
believed that Sax is unlikely to succeed in her lawsuit since she elected not
to investigate the facts.
For that reason, business valuations are cost effective and even essential as
part of divorce proceedings. Cutting corners to save on the cost of an
appraisl may wind up costing you a significant amount more. Appraisers
generally produce written reports which detail the analysis and steps taken
to reach a value conclusion. Even in mediated divorces, appraisals are
important. The parties may select a joint appraiser which helps reduce the
costs associated with the appraisal for both parties.
The Institute of Business Appraisers (IBA) and the American Society of
Appraisers (ASA) have also issued standards for valuing businesses.
Although each business appraisal may require an appraiser to make certain
assumptions about the business or industry, each appraiser follows a similar
general procedure applying professionally accepted standards. This has
decreased the variability valuations. In short, if two appraisers review the
same business, they may arrive at different values, but the gap between their
appraisals should be fairly narrow. As a result, a professional appraisal
would eliminate the inequitable result that Ms. Sax encountered in her
divorce.
Regardless of the size of the business, it is critically important that you retain
an attorney experienced in complex property issues. An experienced
attorney will work closely with the qualified appraiser to arrive at a fair
valuation of the business and provide advice on the legal consequences.
ABOUT THE AUTHOR
Over the past twelve years, Maury D. Beaulier has developed a large and active family law practice which includes mediation and collaborative law.
Mr. Beaulier has been described by his clients as "skilled", "aggressive" and "dedicated" to resolving complex and emotionally charged disputes. Mr. Beaulier is
licensed to practice law in the States of Minnesota and Wisconsin as well as the Federal Courts in Minnesota and the Western District of Wisconsin.
Mr. Beaulier is also a member of Minnesota's Collaborative Law Institute helping to develop new procedures in family law case.
He can be contacted by phone at (612) 240-8005 or or Visit Web Site
or visit his web site at www.divorceprofessionals.com
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