Divorce and Valuing a Family-Owned Business

By Don Schweitzer

During a divorce, the division of community property is usually straightforward and only requires simple mathematics. However, when a couple owns and operates a family business together, the division of that business is more complicated since a typical case involves one spouse buying out the other’s interest. In most cases this requires a forensic accounting in which both parties hire forensic accountants who frequently use different appraisal methods to gain an advantage for their respective clients.

There are several acceptable methods of determining the value of a business, and when there are opposing forensic accountants, we tend to see competing approaches. For example, one accountant may use the market and income approach, while the other may use the industry acquisition and capitalization method. The trial court has wide discretion to choose the method and value that makes most sense to the case and will be upheld on appeal so long as the judge did not abuse his or her discretion.

In a recently published decision*, a trial court was affirmed for accepting the husband’s forensic accountant’s valuation method when it found the expert was more credible than the wife’s expert. Credibility is critical. Parties going through a divorce should be leery of hiring experts who act like they can make silk from a sow’s ear. During trial the expert’s credibility will be tested. If he or she does not stand up to vigorous cross-examination, the spouse who made the decision to choose the expert in the first place will waste a lot of money. Credibility is the most important quality of an expert and should be ever present on the spouse’s mind when searching for the right accountant to do the analysis.

*Marriage of Honer

Categories