Hide and Seek: Determining an Accurate Value of a Business in a Divorce

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Divorce is as much a financial process as an emotional one. If a party does not receive his/her fair share of the marital property, that spouse may be left facing difficult financial circumstances for some time after the divorce. That is why the failure of a party to disclose all of the assets during a divorce is a critical violation of state statutes.

A party to a divorce who is discovered attempting to hide assets can face significant penalties, including paying the other party’s attorney’s fees and costs. However, that does not stop some people from trying. This can be particularly true if the marital estate includes a business that is managed by one spouse.

Why Business Owners Hide Assets

There are several reasons why business owners may be in a position to more easily hide assets. For one thing, the other spouse is often not involved in running the business giving the business managing spouse more opportunity and sometimes more incentive to hide assets.

Minnesota is an equitable distribution state, meaning that, in most cases, all marital assets owned by the couple are subject to an equal division. This includes the value of the marital business. Even if a spouse is not involved in managing the business, it will still be divided in an equitable manner under Minnesota law. More often than not, the business is valued and the managing spouse is assigned that value on the marital balance sheet while the other spouse receives other assets of equal value, such as the home or retirement assets. Sometimes the spouse managing the business pays out one half the value of the business in a cash property settlement often paid in installments.

Intentionally Lowering the Value of a Business

One of the most common methods business owners use to hide assets involves intentionally lowering the current value of the business. After the divorce, the spouse awarded the business recovers the value, thus taking a larger share of the marital property. Common methods of intentionally lowering the value of a business include:

• Allowing customers and clients to make payment on a receivable after a divorce is final.

• Pre-paying business expenses.

• Overpaying taxes, then getting a refund after the divorce is final.

• Underreporting income.

• Using business funds to pay for personal expenses. For example, purchasing an expensive oil painting for the office, then selling it after the divorce is final.

These methods are just a sampling of the ways a business owner may attempt to hide assets.

Accurate Valuation of the Business

Each party to the divorce is able to retain a professional, usually a CPA, to value the business. This involves investigating the business’ assets, liabilities, income and goodwill and setting a fair market value on the business. Depending on who each party hires, there may be significant differences in the value of a business.

An attorney will know who the qualified valuation experts are in the county where the divorce is filed and will choose one who is not only extremely competent to value the business, but who also has the ability to persuasively testify to the judge the reason why the court should accept your value, as opposed to the value found by the opposing party’s expert.

The Discovery Process

Remind your clients that reading private emails, listening to voicemails left on their spouse’s phones and other activities that could be considered snooping can land them in trouble — and are unlikely to yield solid results on hidden assets in any case.

In most divorces, the parties and their attorneys will choose their valuation expert early in the case. In the Twin Cities, there are several firms that are used on a regular basis in divorce cases. The lawyers will chose one of these experts and have an initial conference to establish that there are no conflicts, that the expert has sufficient experience in the particular area in which the business operates and to discuss the parameters of the engagement.

After reviewing key financial documents, the expert will examine the business premises and interview management, the business accountant and often the non-involved spouse. The expert will not, however, conduct depositions, subpoena bank records or prepare interrogatories and other discovery. This is where the divorce attorney will step in, making sure that the expert gets all of the information needed and providing him or her with any relevant information found in the discovery process.

At this point, the attorneys and counsel will often meet with the expert to learn the initial results of the valuation, often in a mediation setting. The parties may accept the expert’s valuation, ask for different assumptions to be made or determine if they need an independent review of the expert’s findings and conclusions.   Kathleen M. Newman

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