Facing Divorce? Tips from the Trenches – Other Considerations for Valuing a Privately Held Business

Written by: Manjula Shaw, CFP®, CDFA®

“Tips from the Trenches” is a series of articles based on conversations with professionals who work with individuals facing or considering the prospect of divorce. Watch this space for conversations with professionals in family and collaborative law, such as forensic-certified public accountants, mediators, marriage counselors, family court judges, and valuation specialists. 

Manjula Shaw is a Certified Financial Planner (CFP®) and an Asst. Vice President at Tanglewood Legacy Advisors. As a Certified Divorce Financial Analyst (CDFA®) Manjula specializes in helping individuals navigate the financial complexities of late-stage divorce, including asset division, alimony, and child support. She is trained by Collaborative Divorce Texas as an independent, objective financial expert committed to helping divorcing couples and families navigate competing and shared needs and develop solutions that best fit the parties and their children without court intervention.

 Manjula’s conversation is with Eric Haverkamp. He is a Certified Valuation Analyst (CVA®), a Certified Divorce Financial Analyst (CDFA®), and a Collaborative Divorce Houston and Texas member. He is a Partner at the Hancock Firm, Valuation Advisors. Eric’s expertise is in the valuation and testimony of small and mid-size businesses in divorce situations.

Lastly, once the company is evaluated using one of the tools mentioned in my previous article, other considerations when valuing a privately held business are:

I. Risk Assessment:

When a business is part of a divorcing couple’s estate, its value often impacts the division of property. The value may be affected by three identifiable risks: operational, financial, and market risk. Operational risks refer to the risks associated with the company’s internal workings and ability to function smoothly on a day-to-day basis. For example, how would the company function if a key employee resigned? Evaluating operational risks helps assess whether the business is sustainable.

The financial risk is the potential for financial instability or loss that can impact the company’s ability to meet its obligations, such as paying its vendors, making payroll, maintaining profitability, or achieving long-term sustainability. For example, suppose the judge rules that the owner needs to split the company as part of the divorce settlement. In that case, this ruling can cause a potential financial risk to the company.

Market risk of a privately owned business refers to the external factors that could negatively impact the business’s ability to operate, grow, or maintain its profitability. These risks arise from changes in the broader market environment, including shifts in consumer behavior, industry trends, economic conditions, and competitive dynamics. Geopolitical events, which are entirely out of the couple’s control, may also create additional market risk. Eric maintains that sometimes he needs to use “out-of-the-box” thinking when he assesses market risk. He valued a wine producer, and due to the lack of options for determining market risk in this space, he had to use an orange juice producer to compare.

II. Prepare Reports:

After completing a full risk assessment, a CVA® compiles detailed valuation reports that include the findings, methodology, and final valuation figures. He presents these reports to the divorcing spouse and his attorney. According to Eric, a final valuation is valid for three to six months. In cases where the valuation is dated, it makes sense to update the previous valuation; Eric says an update could be done at half the cost of the original valuation.

III. Consulting and Advisory:

A CVA® provides strategic advice to the divorcing spouse based on the valuation.
Eric identifies divorce as a unique area for valuation specialists. A divorcing individual may want to consider retaining a specialist who is willing and qualified to testify if their case ends up in court.

IV. Compliance and Regulation:

A CVA ® must ensure valuations comply with relevant accounting standards and legal requirements. This strict adherence to standards ensures the accuracy and reliability of the valuations. They may need to work with tax authorities or in legal cases where business valuation is critical.

In conclusion, Eric says his approach to problem-solving when dealing with a complex valuation is to ask, “How would an actual investor view the company?” Would a potential buyer be willing to pay the price the company is valued at? “Does it pass the real-world smell test?”

Please reach out to Manjula at mshaw@family-cfo.com if you have any questions.
Manjula’s blogs on all topics divorce Blog – Family CFO (family-cfo.com)

 

 

 

 

 

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