Facing Divorce? Tips from the Trenches – What Tools Are Used to Value Your 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.

What are the Steps in the Valuation Process?

Eric explained the steps in the valuation process by demonstrating how he integrates a new client into the Hancock Firm.

Assess Financial Performance:

Eric informs his clients of the scope of the valuation project before he begins. He first reviews the business’s balance sheets, income statements, and cash flow statements to give the scope.

After providing the scope, Eric gives his clients a comprehensive list of all the documents he needs from the business. Once he receives these documents, he can analyze the financial statements, including a review of historical financial performance, to understand the company’s profitability, liquidity, and efficiency. This generally takes 30 – 45 days to complete.  A valuation estimate could run at least ten thousand dollars or more. The costs could be as much as fifty thousand dollars in contentious divorce situations. So, divorcing couples need to weigh the cost versus the benefit of getting a valuation estimate.

According to Eric, incomplete, inaccurate, or inconsistent financial information is common in a sole proprietorship or a small business environment. Such incomplete record-keeping could increase the time and cost of valuing a company.

Evaluate Market Conditions:

A CVA®, like Eric, studies the industry and market trends to assess the competitive landscape.

They compare the business to similar companies within the industry to gauge its market position.

A valuation specialist must look to the future when forecasting a company’s valuation. For example, a manufacturing company that increased sales during COVID, when consumers turned to buy goods and merchandise, may not sustain the same sales in a post-pandemic economy when consumers spend more on services and experiences.

What Tools are Used in Valuation?

Valuation specialists can select and apply appropriate valuation methods, such as:

    1. Income Approach: Estimates value based on the company’s expected future cash flows. According to Eric, the income approach may be the best-fit method when the founding spouse anticipates continuing to run the business and support his children after the divorce.
    2. Market Approach: Compares the business to similar companies that have been sold or are publicly traded.
    3. Asset-Based Approach: Values the company based on the fair market value of its assets minus liabilities. Generally, the asset-based approach is used when it is assumed that the business will no longer be a going concern. The value may be further discounted, considering the assets must be sold in a “fire sale.” One of Eric’s cases involved valuing a manufacturing business that had experienced operating losses. The market outlook was bleak. However, the equipment and machinery were valued at $9 million. The opposing counsel picked the asset-based approach to valuation, aiming to grant a higher portion of the estate to his client. However, for purposes of valuation for the divorce, the business had to be evaluated as a going concern. The company employed 25 people, and Eric’s client, the proprietor, needed to keep the operation running in order to provide himself and his employees with a livelihood. Eric arrived at a $2 million valuation using the income approach, which ensured that his client’s and his employees’ livelihood was preserved.

 

Stay tuned to read about other aspects to consider when dividing a privately held business.

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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