You Need a Credible Valuation of a Closely Held Business

In the divorce process, often the largest asset of value is the closely owned business.

By Bob Krawitz

In the divorce process, often the largest asset of value is the closely owned business. Often the divorcing parties strongly disagree with a value even if the ownership interest is in the name of one spouse, for the asset may be marital if acquired, financed or improved during the marriage.

The divergence of the estimated value of the business significantly increases when one of the parties to the divorce is actively involved in the business. A non-working spouse may have a misguided belief to rely on the estimate of the working spouse because of a fear that the cost of a valuation may be prohibitive.

Legal counsel represents clients with credible and defensible information. Reliance on an uninformed estimate of a value may cause an unfair settlement and subject the representing attorney to risks of malpractice attacks.

Paralleling the client's confidence in the attorney when engaged to represent him or her, certainly includes an expectation that work would include a qualified valuator. An experienced valuator will not rely on traditionally prepared financial reports for the true value of a business begins with economically adjusted information and includes both objective and subjective information. Valuations are a combination of the science and art of identifying the material ingredients composing the estimated value or worth of the enterprise.

A consulting attorney or valuator is often engaged predicated on their experience, particular expertise in the subject and credentials. Furthermore, continued education and development of the programs required to continually assist their clients in the most efficient and qualified manner is mandatory. Unique issues of divorce requires the attorney and valuator to be aware of the unique laws of the various States and current Court cases. Essential in this effort is the availability of reference libraries and knowledgeable specialists of the industry of the business considered for a valuation.

As valuators, we recognize that each business poses a unique conglomeration of people, customers, suppliers, regulatory issues, competition, economic factors and other internal and external factors directly effecting the value of the business. All of the strengths, weaknesses, opportunities and threats inherent to a particular business must be analyzed in a cohesive manner recognizing any cause and effect of individual elements.

A reliable valuation must identify that the purpose of an assignment pertaining to divorce issues inherently raises issues divergent from assignments as a valuator considered for estate issues, buy/sell arrangements, strategic sales, insurance etc. Reliance upon "Rules of Thumb" or other estimates will probably confuse and cause further anxiety and expenditures of useless time and money. Importantly, the valuator must be independent and be capable of issuing a credible and understandable report that will assist the divorce lawyers in establishing a workable solution to the allocation of the business asset.

Often a valuation report will suggest opportunities for further development of services offered to the business community. Each business's vulnerability to the perils of insufficient succession, estate or financial planning may become evident in the process and provide additional services that should be considered. A credible valuation report is often the catalyst to the implementation of progressive action programs for a business.

In summary, the retention of a qualified professional business valuator, where a major asset is a closely held business, is an important ingredient in the determination of the fair value of the total worth involved.

Robert J. Krawitz, CPA, CVA, has over 35 years experience as a public accountant. He is a partner with BrookWeiner, L.L.C., a Chicago based CPA firm specializing in consulting and valuations of closely-held businesses.