Appraising your business for Divorce in Pennsylvania

You are in the middle of a divorce. You are also running a business. How do you keep one from affecting the other?

Business owners have a particularly volatile issue to address in divorce. For many married owners, the business is both the most valuable and most illiquid asset in the marital estate. Consequently, valuation of the business, how much is considered marital asset, and how it is divided in the divorce may very well cause conflict.

If you started your business before you met your spouse, you are concerned that its value before marriage does not get thrown into the list of marital assets to be split. If you started your business after the marriage, or even with your spouse, the timeline is cleaner, but each party’s feeling of ownership and value added may be stronger, which can translate to more conflict.

Getting a good business valuation by a neutral party that both sides accept is key to keeping discussion of business assets on an even keel. An evaluator’s neutrality, experience and competence will also impress the courts. Therefore, your regular business advisors or accountant or even a relative who does such valuations for a living are not appropriate choices. The key is impartiality and proper credentials.

What are proper credentials? There are several recognized, professional business-valuation organizations that maintain lists of properly trained and/or certified individuals. Some are: the American Society of Appraisers; the Institute of Business Appraisers; and the National Association of Certified Valuation Analysts. www.Businessappraisers.com is also a helpful resource when you are considering the reasons and methods of business appraisal.

Even when you’ve found a properly trained and certified appraiser, they must also have substantial valuation experience in your particular kind of business in the state where your business operates. You would not want a retail food specialist from Louisiana looking at the value of a small accounting firm near Philadelphia, for instance. Matching training, credentials, and specialties is crucial, to the opposing spouse, but also to the judge.

Next, the choice of what is to be valued must be determined. The amount or percentage of ownership to be valued is the starting point for any appraiser, and will guide their choice of methodology and analysis. A 51-percent or more ownership represents a controlling interest in the business, which, obviously, is worth more than a smaller share. However, if you and your spouse own the business 50-50, the concept of controlling or noncontrolling interest does not apply because of familial relationship.

Things can get even more complicated if, say, you started your business pre-marriage with one or more partners, some of them relatives, then you brought your spouse into the organization. Parsing out the portions and the timelines may be excruciating.

It’s important that your evaluator knows Pennsylvania’s case law on business valuation cold. For instance, most business valuation standards use Fair Market Value, or what a hypothetical buyer would pay for the business. The same standard may not apply in marital estate evaluations, particularly as concerns discounts for marketability or minority-ownership, or separating out the values of corporate and personal goodwill.

In short, don’t skimp on choosing a good, experienced, specialty-specific and geographic-specific evaluator. The money you save by taking the cheapest evaluator will not make up for money lost in arguing with your spouse or their counsel over that evaluator’s opinion.