Note first – I’ve taken the ‘how will a judge split it’ to mean how will the judge split value as opposed to any other form of splitting a business, and therefore reworded the question very slightly at the end.
When a business is owned by one or both spouses in a marriage, the judge will equalize the value of the company between the two parties as part of the overall equalization. In terms of equalization, it doesn’t matter if the company is owned 50/50 or 100% by one spouse, the value will be split 50/50 in line with divorce laws.
The Statement of Net Family Property shows all assets and liabilities of both parties, and the net value is then split between the two spouses. As a simple example, if one spouse owns a business that is worth $500,000 and the other spouse owns cash and investments of $100,000, then the first spouse will have to pay the second spouse $200,000. Now, both spouses have $300,000 of net assets. Of course, there are many other assets and liabilities that would be owned by the spouses in a normal divorce, but this helps illustrate the process of equalization.
When a business is involved, the question of value is very important. Chartered Business Valuators (CBVs) specialize in determining the value of a business for many reasons, with equalization being one of the most common reasons for our reports. A quick summary of the process involved is that the CBV will be engaged to value the company, will gather financial and other information, conduct research and then present a report with a value conclusion. The value conclusion can be used in trying to settle the matter with the other party, or can be used in court if required. Often, both sides will get a valuator and if a significant difference arises between the valuators for any reason, each valuator will testify about their reports in front of the judge. Another route is that of a joint retainer, where both parties agree to engage one CBV to conduct the valuation instead of the additional cost of having two valuators.
In most cases where there is joint ownership, one spouse will buy the other spouse out of the company. This is because continuing to own shares together after separation is not usually ideal. If this is the case, the current value is important. The spouse that will continue to operate the business will purchase shares from the spouse that will be leaving the company at the current value. The process that the CBV will undertake is the same, with the date being the only difference.
The value of your and/or your former spouse’s company will depend on the type of company it is, how profitable it is, the risk of the business continuing to do well, and various other factors. The CBV is well-trained and well-experienced to be able to research and find out the information needed to assess all of the factors that impact value.
The biggest slowdown in the valuation process, and therefore the issue that causes the most additional cost, is lack of disclosure. If you are having your business valued for a divorce equalization, be sure to give all the information that you are able to. This will keep the valuator moving along in the process and save you money, time and headaches.
Brad Borkwood is a Chartered Accountant, Chartered Business Valuator and the President of Bluepoint Valuations Inc. Brad and his team are committed to delivering business valuation reports with depth and strength that are also easy to understand, as well as informative videos that are ready to defend in court. Brad can be reached at 1-888-894-7772 or visit his website www.bluepointvaluations.com.