If you or someone you love is facing a divorce, you need to know about business valuations. This is a crucial but often-overlooked element in the divorce process and can make a HUGE difference to the bottom line. We spoke to Lisa Gill of Gill Family Law in Memphis to break down all the details surrounding business valuations and learn why they’re so important.
What does ‘business valuation’ mean?
“A business valuation usually occurs when a forensic accountant uses certain business documents to determine the market value of a business,” explains Lisa. “It’s a way to answer the question, ‘If this business were to be sold and valued to the marketplace, what would it produce as a dollar value at its sale?’”
When it comes to understanding a business valuation, Lisa compares the concept to an appraiser placing value on real estate. However, business valuations tend to be much more complex.
When should a business valuation take place?
To put it simply, if you’re a married or soon-to-be-married business owner, a business valuation should take place as soon as possible. This ensures you know your business’s value at the outset, and you can more easily determine its worth if a divorce arises. Not to mention, it’s likely going to save you thousands of dollars in the long run.
“It’s important to have a business valuation done once you realize that it’s an issue that needs to be addressed in your case,” says Lisa. “A lot of times what I see is people spending tens of thousands of dollars trying to negotiate these issues too late.”
Business valuations are a key component of prenuptial agreements.
As a family lawyer, Lisa says she often sees women who are relatively uninformed or under-informed about business valuations — especially when there is a prenuptial agreement involved. Prenups often give a predetermined liquidated amount to which the non-business-owning spouse is entitled. Or, there might be an option that offers the non-business owner a specific percentage, depending on how many years the couple is married.
Either way, Lisa again encourages people to do a business valuation as soon as possible to avoid the potential headaches of litigation and high legal fees in the future.
If you’re getting a prenup — get involved.
If a prenuptial agreement is involved, Lisa emphasizes the importance of ensuring both spouses are in control. “The main thing I see is that just one spouse is often in control of the timing, and this prevents meaningful negotiation between the parties,” she explains. “One spouse is hiring their attorney early; they are working through the terms, and the other spouse is getting the prenup dumped in their lap a week before the wedding.”
This can be significantly more expensive for the spouse receiving the prenup, as most attorneys will charge a higher retainer to negotiate the prenup under a tight deadline.
Know who legally owns the business.
Lisa also adds the importance of accurately determining ownership within the business. For example, a wife may be working with her husband in a business only he legally owns. Therefore, it’s essential to know your role within the company and the rights that come along with it. While one spouse may be the true owner of an LLC or corporation, the other spouse might technically just be an employee of the business — and their rights will differ significantly.
On the other hand, if you’re a business owner, Lisa says it’s important to understand that making your spouse a member of your business or a shareholder gives them real authority — even if you did so simply to compensate your spouse or to help with tax write-offs. “A business-owning spouse needs to be especially cautious about prenuptial agreements and making their intent clear to keep your business a separate property,” adds Lisa.
Hire an expert — as early as you can.
A business valuation can be complex, and there are different approaches to placing value on a business, so hiring an expert and doing so early in the process is crucial. “I worked in other areas before family law, and if you’re not versed in understanding business organizations, you might have struggles understanding it,” explains Lisa. “It’s important to use a family lawyer with that experience or background because they’re going to know what to ask for and how to make solid legal arguments.”
Just as important as choosing a family law attorney, is choosing the right business valuation expert. Lisa says you want someone who has the right credentials and experience, so when you’re interviewing or meeting with an expert, it’s important to make sure they have family law business valuation experience. As for credentials, the most common ones are CVA (Certified Valuation Analyst) and ASA (Accredited Senior Appraiser).
It’s also important to note that if you find yourself in a scenario where you have not placed a value on your business through a prenup or prior valuation, don’t fret, as there are still options available. Lisa says couples can mutually agree on a business’s value (although this is uncommon), or they can opt for a business valuation during the divorce process. “The parties have the option to either use a joint expert to value the business, or they can each hire their own competing expert to value the business,” adds Lisa.
Why Gill Family Law?
When it comes to the process itself, Lisa says she and her team approach business valuations differently than many, thanks to their one-of-a-kind expertise. As a small business owner herself, Lisa is well-versed in the business world and how it works.
“I understand from the inside perspective how these things can occur and how even sophisticated people might not have the same level of awareness that their family law attorney might have about their rights and access to information,” says Lisa. “I understand how bewildering that can be. We try to streamline the process and make it as simple as we possibly can.”
This article is sponsored by Gill Family Law. All photography by Elizabeth Looney.