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Valuing a spouse's business

Are you worried about your spouse ripping you off in your divorce proceedings?

Duncan Calder, former KPMG senior partner and head of its W.A. forensic services and business valuations practices, warns that your spouse not be disclosing to you the true value of his or her business during your divorce.

Have you considered - “Is my spouse hiding the real value of the business from me?

A fair resolution hinges on its accurate valuation. That can be achieved by working with an experienced valuation expert who understands how courts handle challenging divorce issues and the application of established, appropriate valuation practices.

Calder, who runs the boutique forensic services and business valuations firm, Contour Capital, notes the critical importance of this issue in assessing the fair value of the family’s asset pool and argues that:

The most significant asset in a marital estate is often the family business”.

The problem of different knowledge levels – one spouse may often have had little to do with the business, will often either have a grossly inflated idea of its value, or massively undervalue it. Due to their lack of involvement, they realistically do not know what the business is truly worth.

Calder, a business valuation specialist for some three decades, advises spouses who may be unfamiliar with the family business:

IGNORANCE IS NOT A VIRTUE - Be informed and don’t bury your head in the sand!

If you have ever been concerned with marital finances before, now is the time to get involved. Don’t accept the financial disclosures of your future ex at face value: search the records for joint holdings and if necessary get advice from a financial advisor and your attorney. It’s critical that you have an experienced divorce attorney on your team to help you spot and resolve any attempts by your spouse to conceal money in order to gain a better settlement.

Some may attempt to assess the value of a business based purely on the evidence of ongoing contracts, and while it can be tempting to say “there is no goodwill” in the absence of these contracts, this often is not the case. This is why an expert valuation is required to assess the true value of the business.

Businesses can also be used to hide money. If one of the parties retains the business it can become tricky because they can potentially manipulate their income, sometimes through increased expenses, to dramatically reduce child support payment obligations.

Even if a business may not be valuable to sell, it can still be a valuable asset because it is likely to deliver an income.

Business valuations are almost always highly contentious during a divorce”, Calder states.

The person who wants to keep the company puts a low value on it to minimise the cost to buy out the other spouse’s interest. The person who is not keeping the business wants a high value to maximise the amount of buyout received. Spouses rarely agree on the value of a business.

There can sometimes be legitimate reasons for the reduction in performance (and hence value) of a business and the emotional and financial burden created by divorce can impact an owner's ability to manage the business and adversely affect productivity, profitability, and employee morale. But often there is no legitimate reason for the reported financial performance of the business dropping dramatically.

Courts are aware that the profit and loss statements are usually less than accurate in a small business because of things like personal expenses masquerading as business expenses, discretionary expenses, and business perks. The divorce court will consider the amount of money the couple or family took out of the business as income, as well as personal expenses, perks, and other items. Sometimes it is worth more to the spouse who does not get the business to adjust the value of the business a little lower in exchange for bumping up the income of the other spouse to increase the alimony. The difference in alimony can more than offset a lower business interest buyout.

Duncan Calder, based in Australia, sees that the role of forensic specialists, like Contour Capital, is to uncover the truth and endure that the Court is aware of the true financial position of parties to divorce proceedings.

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