What Would Be Considered As The Value Of The Business In A Valuation?
Yes, the business valuator has to consider the brand’s value, the customer base, the reputation, the employee relationships, the intellectual property, the proprietary process, any intellectual property, and when they’re going to expire. They also consider hard assets. They consider the depreciation that’s already been taken. They consider retained earnings, bank account values, and the company’s assets in deciding their value.
What Do Expert Evaluators Base Their Valuations On? Is It Market Trends?
In evaluating and appraising a business, the business valuators use past sales of similar businesses considering the fair market value if the business were to be sold. They look at similar businesses that have been sold, and they look at the same or similar revenue. They also look at an equal number of employees. They look at all the little nuances of the businesses that have been sold and analyze the similarities and develop what this business is worth based on how other businesses have been purchased in the last two years.
Currently, because of COVID, there has been a real shakeup in this method of valuation because everyone has argued that valuing a business in 2022 after going through this year’s COVID is extremely different than it would have been pre-2020. Many business sales have been challenged to determine a future value because people are claiming that everything is too uncertain to set a value for the business. The uncertainty that the pandemic has created, has unjustly slowed down the process of valuing businesses. We still can see what people bought businesses for in the last year, but in divorces, often people want to slow things down. The person who owns the business and controls all the assets isn’t excited or swiftly moving toward dividing those assets and giving up control of half of them.
A divorce can put a business at risk. However, there are many reasons for both sides not to let that happen because killing the golden goose is a really bad choice for everybody. However, in some situations, if there aren’t other assets sufficient to fund the buyout of one of the spouses from the business, there is a chance that the business will need to be sold or that other investors will need to be brought into the business to liquidate some of the value to pay off the other spouse. In Illinois, the courts lean toward dividing the parties and not having assets that they own jointly in the future. Almost all courts lean toward one party taking the business and not allowing both parties to keep the business because the reason they’re getting a divorce is because they can’t get along. Having business owners or business partners who are getting divorced doesn’t work, and there’s case law that says it doesn’t work.
There are times when parties agree to own a business in the future together because if they were to divide it, it would jeopardize a business. For example, the business isn’t financially able to pay one party out and then continue to go on. In Illinois, generally, assets are divided on a fifty-fifty basis. So if the parties have $3 million in assets, plus a business worth $10 million, it’s not possible to use the other assets to buy out the party. In situations like this, sometimes it’s acceptable to set up a payment plan over multiple years. However, if that business owner is buying the business outright and agreeing to a payment for the business that is not dischargeable in bankruptcy. If the business doesn’t do well in the future, the business owner is still responsible for that property settlement payment that they’ve agreed to.
In many cases, both spouses are very involved in the business. That puts both spouses in a predicament because whoever buys the other out means the other now has no income, putting them in a position where they will receive maintenance or spousal support. Not only are they going to receive spousal support, but they’re going to receive 50% of the business’s value in assets. Many times, it’s hard for somebody to swallow having to buy their own business from their spouse and then be obligated to pay that spouse maintenance each month.
In cases in Illinois where there’s more than $5 million going to one spouse, maintenance is often not considered necessary. But in the situation where the spouse makes a million dollars a year, even if one of the spouses is getting half of the assets, which is $5 million, the courts would still make the other spouse pay maintenance because the $5 million is not capable of sustaining the lifestyle with which that spouse had become accustomed to. The $5 million can’t throw off $1 million a year in income. So there’s no bright-line rule about how much money you have to have in order for maintenance not to be an issue or not have to be paid.
If the business is non-marital, then the business may not be subject to the division during the divorce because it’s a non-marital asset. The value of the non-marital asset is considered when dividing the marital assets. Suppose one party has a large non-marital estate and the other party has zero. In that case, the party with no non-marital estate will likely receive a larger percentage of the marital estate. There is no set amount. If you look at the case law, sometimes it’s 55%, sometimes it’s 65%. I haven’t seen higher than that in the case law, but it’s dependent on each case, and often, that is a negotiated figure. Courts don’t give a larger percentage to one party than the other based on non-marital assets. Negotiating an unequal division is likely, and it often happens. The court does not, often at a trial, get a larger proportion of the marital estate to one side or the other. The norm is fifty-fifty.
If a business is considered non-marital, but if there’s been a comingling of funds between the marital estate and the non-marital business, that can impact the division of assets. The non-marital business often must reimburse the marital estate for the contribution the marital estate made to the non-marital business. Now, suppose it’s possible to trace the money from the marriage that went into the non-marital business. In that case, it’s easy to reimburse that. Suppose it’s not possible to trace that money and the money has been comingled. In that case, the court will determine that the non-marital business has become marital based on the comingling of funds.
The other option is that the court can decide that it was a marital gift to the non-marital business if it was well-documented that the business was non-marital and if both parties knew that marital money was being given to the non-marital entity. The court has the right to rule that the money that went to the non-marital business was a gift. That often frustrates clients, and they don’t like that outcome, but it is a possibility. It’s important to get an excellent financial expert and accountant to help with the tracing of funds and help with that argument. If you can’t trace the funds, the next step is the court deciding whether the business is marital or non-marital, and that’s a scary proposition. Hence, we almost always get experts to trace those funds carefully.
If that business was created during the marriage and the business owner received their education through marital money, there is an argument that the marriage owns the person’s degree. Even if there are no school loans because both spouses paid for it, it can be a successful argument that they both own that degree. Courts have ruled in the past that the person and the degree are inseparable, and the marriage doesn’t own the person. Therefore, the marriage doesn’t own the degree.
The other spouse will receive maintenance according to the statutory amount, even though they paid for or worked to help get that medical degree or law degree. That seems unfair when looked at just that one thing. Still, the truth is often that spouses are together through college, and one spouse sometimes doesn’t even go to college while supporting the other one going to college. Whether they become an accountant or become a salesman or become a truck driver, it doesn’t matter. The spouse that supported that education and provided them more opportunity to have a job often feels as though they are owed more than maintenance. In Illinois, maintenance being statutory gives very little wiggle room to argue that your contributions to the other party’s schooling made such a difference.
The division of assets in marriage talks about each party’s contribution to the union and the marital estate. That’s where you could also make that argument. Still, courts have not been known to readily give more assets based on the mom staying home and letting dad go to school, and instead of him going to school, she stayed at home and took care of the kids. The courts have found that the person’s efforts to go to school are equal and similar to the efforts the person made to stay home, and therefore, the statute is appropriate to be applied.
Now, the opposite argument often happens in high-net-worth cases. A doctor, a dentist, a lawyer, a businessman, and a business owner argue that a spouse stayed home and that they contributed everything to the marital estate. They went to work, they’ve made all the money, they’ve made all the financial decisions, they made all the investments, they created all the wealth, and therefore, they should get a larger portion of the wealth because they’ve created it. The court says the contribution that the stay-at-home spouse made was equal or similar to the contribution that the party that worked made, and therefore, that doesn’t affect the division of assets.
If one person took non-marital assets and contributed them to the marital estate, sometimes they want to get it back. Judges rule that when you put money into a house and put the house in both parties’ names, it’s a gift to the marital estate. Now, you’re not going to be surprised that all people claim that it was not a gift during a divorce and that they expect agreed payment. There are cases where people claim what they intended 20 years ago is irrelevant when 20 years later they’re getting a divorce. They think they will get that money back as a non-marital, but that is not necessarily how the courts rule on that issue. It’s the same if you take marital money and you deposit it into a business. If you sign an agreement that it’s non-marital, you’ll get it back. But if you just put it into a marital business, it’s unlikely that the court will reimburse that money back to the party who deposited it.
When anything has debts attached to it, the party who receives the asset that the debt is attached to as part of the division of assets in a divorce keeps the debt. In a divorce decree the language used says that the party who takes the asset and the debt will indemnify and hold harmless the other party from that debt. Now, as long as your name isn’t on that debt and it’s in the business’s name or the spouse’s name, you can feel fairly confident that the creditor cannot come back after you. However, in the case of credit card debt where both parties have taken out a credit card jointly, one party is responsible for the payment of that credit card. If the party responsible for the credit card in the divorce decree doesn’t pay it. The credit card company agrees with the other party and will come after them.
Now, in the marital settlement agreement, it should say that the party who is responsible for it will indemnify and hold harmless the other party. But in the event of a bankruptcy or in the event of an illness or a change in circumstances that makes that party truly unable to pay it, getting them to indemnify or hold harmless is probably going to be a worthless promise. The debts need to be paid off in both parties’ names as part of the settlement. Whenever possible, the person whose name is on the debt needs to take the debt so that the person whose name it’s on is responsible for paying it. We try very hard to protect both parties from somebody else’s debts, but it is one of the things in a divorce that can come back and create a problem for someone because you’re not protected from the contract that was signed originally by the new court order.
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