Virginia law authorizes the divorce court to value and equitably distribute marital assets. The business must be valued if either or both spouses own a closely held business such as a corporation, limited liability company, partnership, or sole proprietorship. Physicians, dentists, lawyers, real estate developers, manufacturers, entrepreneurs, and many others may own closely held businesses and have to deal with this issue during their divorce. The attorneys at Stiles Ewing Powers frequently represent business owners or their spouses going through divorce. They can advise and represent the client to address the case’s important and potentially valuable assets.
Methods for Valuation
A closely held business cannot be valued by simply looking at stock quotations and comparable sales. There are several methods for valuing a closely held business. While the Internal Revenue Service uses fair market value or the price a willing buyer would pay a willing seller, Virginia divorce courts use intrinsic value, or the value of the business to the parties. Fair market value may include discounts for minority interest and lack of control. Intrinsic value generally does not apply those discounts. The provisions of a buy-sell agreement may be considered by the court in determining intrinsic value, but the buy-sell agreement is not binding or determinative of intrinsic value. Having an attorney who understands the different valuation methods is important for effective handling of the divorce case.
Classification of Business Property
In addition to value, the court must determine whether the business is a marital asset, a separate asset, or a part-marital and part-separate asset. This is called classification. The business’s separate portion remains the owner’s property and is not subject to equitable distribution. The date when the business was created, acquired, or further investments were made can impact what presumptions the law assigns to the classification and which party has the burden of overcoming those presumptions. Being able to identify and present the necessary evidence to allow the court to properly classify a business asset can have a profound effect on the financial outcome of the divorce case.
The divorce court lacks the authority to order the transfer of a business that is owned by one spouse to the other spouse; however, the court may value the business and order the spouse who owns the business to pay money to the other spouse based on the value. Proper valuation of the business can have significant financial impacts on both the payor and the recipient, especially if the business does not have the liquid funds to pay the monetary award, and other marital assets must be used to compensate.
Experts and Discovery
Classification and valuation frequently require the engagement of outside experts such as certified public accountants, certified valuation analysts, and appraisers. The opposing party may engage experts who have a vastly different opinion of value. Substantial documentation must be provided to allow the financial experts to prepare their opinions on classification and value. The business owner will generally have access to the documentation. The non-owning spouse can compel the production of the documentation through a process called discovery. Having an attorney who understands the methodology and can assist and work with the experts to prepare their reports and contest the opposing experts’ opinions is vital to providing advice and representation in the client’s divorce case.
The divorce lawyers at Stiles Ewing Powers have many years of experience working with professional accountants and business valuation experts to determine the classification and value of a closely held business, negotiating a resolution, and trying the case in court if it does not settle.