Business valuation is no simple thing; perhaps best described as more art than science. There is a reason why expert witnesses are often required in valuing businesses, particularly medium or larger. And in some ways, a publicly traded business is easier to value than a closely held one.
Here, let’s consider some of the threats to a business, existential and otherwise, that may impact its valuation.
Threats to Business Valuation
What if there is a pending lawsuit against the business? It could be something boring, like breach of contract or something with a bit more life like an employee whistleblower claim. Perhaps right now the other side is pre-suit, and the last thing you want to do is pay a premium to your ex and then have your business be devalued by a large civil settlement or jury award. In such situations, you will want to raise these issues during the valuation process and indicate that the risk should be shared between spouses.
There are other risks, of course, as many as the mind can conceive. Perhaps you own a farm in an area with increasing drought. Perhaps you own beach front property in areas increasingly hit by hurricanes, or where insurance companies are pulling out. Again, a royal pain in the you know what, but also an interesting consideration for valuation. Although the past may be the best predictor of future events, we live in a world of increasing ‘black swan’ events. It’s ok if you wish to roll the dice, but make sure you’re doing so with your eyes open.
Mitigation of Risks
To some extent, insurance can help mitigate the risks, and help smooth things pre or post divorce. Cybersecurity issues may be insured, along with workers’ compensation claims of employees, but perhaps there is a gap of insurance when it comes to wage and hour claims, the potential of employee unionization or strike, or employee discrimination lawsuits.
You and your attorney will need to make the case to the evaluation experts that all reasonable risks must be baked into the cake (so to speak) of the ultimate valuation. Likewise, the other side will be attempting to paint your business as on the upward swing, and thing of all the ways your ships will come in and earn outsized profits. And you will be required to work harder than ever before even though you’re going to have to split your baby, one way or another.
It all seems less than fair, but business owners are often victims of their own success. And perhaps there will prove to be no way to fully avoid that, but regardless all attempts must be made to minimize the damage.
Conclusion
Business valuation will impact everything from equitable distribution to alimony. By properly positioning your business, flaws and all, you can hope to achieve a fair valuation that will leave you in the best position moving forward, post-divorce.
Partner with Carl Taylor, Esq.
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