Business valuation arises in divorce cases where one or both spouses have an ownership interest in a closely held corporation – that is, a corporation which has a limited number of shareholders. This ownership interest is usually considered a marital asset, just like real property or a bank account, and is thus subject to equitable division in a divorce. Valuing a spouse’s interest in this type of business can be a complex process due to the fact that there is no market on which a spouse could readily liquidate his or her shares. Accordingly, in many cases, the divorcing parties will retain a business valuator to determine the value of the spouse’s ownership interest in the company.
The parties can choose to undertake a joint business valuation in order to reduce costs, and can even agree to be mutually bound by the value which the business valuator comes up with. In the alternative, only one spouse may retain a business valuator, or both spouses may choose to retain two different valuators. The next step is for the parties to agree upon the standard of value which will be used in the valuation; in Massachusetts, all business valuations which are conducted as part of a divorce rely on the standard of value described in Bernier v. Bernier, 449 Mass. 774 (2007).
After receiving some basic information about the business, the valuator will typically give the parties an estimate of the cost of the valuation before the parties decide to retain him or her. From there, the business valuation process can vary considerably depending on the specific nature of the company. In general, the business valuator will request numerous financial documents from the company, such as tax returns, financial statements, balance sheets, and documents regarding compensation and benefits provided to employees. The valuator will also meet with the company’s management on at least one occasion and will schedule a site visit to the company’s headquarters, production facility, or main office.
At the conclusion of the business valuation, the valuator will generate a business valuation report which details the current and predicted future value of the spouse’s interest in the business. Depending on the scope of the engagement, the business valuation report may also include other analyses – for example, of the shareholder spouse’s benefits and compensation package. The spouses may then agree to a value of the business based on the information contained in the business valuation report. If the spouses do not agree, or if they have retained separate valuators who have arrived at disparate values of the company, then the business valuator(s) may be called to testify at a divorce trial regarding their methodology and techniques. Absent agreement of the parties, the judge will ultimately be tasked with assigning a value to the business and equitably dividing that value between the spouses as part of a judgment of divorce.