A lot of financially complex divorces involve family businesses, whether those are largely controlled by one spouse or both.
Unfortunately, the issues with valuation of the business are not easily resolved. First, couples have to agree on how the value will be fixed, whether that’s asset-based, income-based, market-based or some other fashion. Then, you have to watch to make sure that nothing unfairly slants the results in one party’s favor.
What are some signs of trouble?
Here are some red flags to watch out for in valuation reports:
- Incomplete financial information: Lack of transparency or missing financial data can be a significant red flag. Make sure that the valuation report is based on accurate and complete financial statements.
- Failures to look at the market conditions: If the valuation report does not take into account current market conditions, industry trends or economic factors, it may not accurately reflect a true value.
- Overly optimistic projections: Unrealistic projections about the future or overly optimistic assumptions about the business’s performance may unreasonably inflate the valuation.
- Asset undervaluation: Deliberate undervaluation of assets, such as inventory, real estate or intellectual property, can be a tactic to reduce the overall valuation of the business.
- Ignored liabilities: If the valuation report does not adequately account for all the business’s liabilities, it may result in an inflated valuation.
- Inconsistencies in methodology: Inconsistencies in the application of valuation methodologies can raise concerns. Ensure that the chosen valuation approach is appropriate for the nature of the business and that the methods are consistently applied to avoid double counting or biased assumptions.
- Conflicts of interest: Be cautious if the appraiser has a conflict of interest, such as a previous relationship with one of the spouses or a financial interest in the outcome of the divorce.
- No explanation for decisions: The valuation report should provide a clear and detailed explanation of the methodologies used and the rationale behind key decisions. The inability to defend a valuation and a lack of supporting documents is a big problem.
- Inadequate market comparisons: If market comparisons are used, ensure that they are relevant and based on comparable businesses. Using inappropriate or outdated comparables can give misguided results.
If you’re going through a divorce that involves a business, it’s always wisest to have experienced legal guidance on your side.