Business Valuation and Divorce: Things to look out for

Business-Valuation-and-divorceBusiness valuation and divorce go hand in hand in North Carolina.  If you have a small business or professional practice that is in need of a business valuation for your divorce, there are some significant considerations that you must take into account. First, a common trap for business valuation experts is to develop a bias towards valuations that are either a “good” or “bad” depending on the current state of the economy. Such biases can lead to inaccurate valuations.

According to George Hawkins of Banister Financial, Inc. in Charlotte, there are a number of “good” and “bad” economy myths that surround business valuation and divorce – they frequently come out in business valuations during up and down economies. Here are a few “good” and “bad” economy myths:

  • All business values are up/down
  • All valuation multiples are up/down
  • All company earnings are up/improving/down
  • Things are so bad it will take years to recover
  • Things are great. This is not ending soon!

There are a number of ways to counter an overly “good” or “bad” business valuation. Mr. Hawkins recommends returning to basic fundamentals and “asking detailed questions necessary to fully understand the company, its customers, industry, and forces that impact it, its earnings, and its outlook.”

Warning signs that a business may actually be in hot water

There are a number of warning signs that will show up if a business is truly in bad shape. When evaluating a business, it is important to look for these signs in an effort to minimize potential risk to our clients. Once again, Mr. Hawkins has provided a list of indicators that you should consider as warning signs that you or your spouse’s company may be in distress:

  • The presence of tax liens related to non-payment of payroll taxes;
  • Slow payments to suppliers and vendors;
  • Late issuance of financial statements;
  • Recent departures of key employees;
  • Officers advancing loans from the company to themselves (as opposed to paying themselves salary);
  • Large losses;
  • Frequently changing accounting firms;
  • Large negative cash balances in the books, while positive cash balances in bank account statements

In addition, most small businesses are heavily reliant on bank loans to help finance their short-term financial obligations. If the business is having problems (i.e. slow payments, non-compliance with loan covenants, bounced checks, etc.) then there will probably be evidence of these issues at the bank. A divorce attorney can subpoena bank records and credit files if necessary to help determine if there is a problem.

Business Valuation and Divorce

Information is your best friend in these situations. If there are a number of warning signs (such as those listed above), then it doesn’t necessarily mean the business is headed for liquidation. However, access to this information will give you and/or your attorney the tools needed to be proactive in protecting your legal interests. In addition, this information may show whether it is likely or not that the business can make a turnaround. If liquidation is inevitable, then you can look to value other business assets, such as:

  • Patents, trademarks, other intellectual property
  • Buildings, equipment, etc.
  • Goodwill and other intangible assets

What to do if you think your family business is in jeopardy

It is not uncommon for businesses to suffer when the owner is going through a divorce. This is especially true when the value of the business is tied directly to the owner/operator (i.e. a professional practice, doctor’s office, law practice, etc.). However, other, larger business can also see problems – especially if systems are not already in place to keep the business operating when the owner is not present.

The bottom line is that you must stay aware of what is going on. If you are the business owner, we recommend that you seek out legal counsel very early in the process (even before you might think that you are getting divorced) so that you can plan for future events like divorce or death. If you are the spouse who relies heavily on your spouse’s business for your livelihood, then it is important for you to stay informed about how the business is run, where the cash is going (and how much), and whether you are listed as a personal guaranty on any business obligations. The more you know about the business, the easier it will be if/when you get divorced.

Next Steps…

Here at The Hart Law Firm, we will work with a business evaluator such as Banister Financial, Inc. to assist us in valuing a family owned business in divorce. If you or your spouse have a family run business and you are contemplating divorce in North Carolina, please contact us to schedule a time to discuss your situation at (919) 883-4861 or fill out our contact form and a representative of our office will call you back.