Many contested divorces may be complicated. This level of complexity may increase several times over if you and/or your spouse owned a business enterprise. In order to reach an equitable distribution, the business must be assigned a specific value and, many times, the value of a business in a divorce is a source of profound disagreement. If that’s you, make sure you have a South Florida family law attorney on your side who is familiar with these processes, including all of the components that go into a proper business valuation.
M.K. and K.K. were one of those divorcing couples. The couple, in the mid-2010s, bought an insurance agency from the husband’s parents. The agency provided auto, renters, home, life, RV, and business insurance policies to customers in North Florida and had been in existence since 1974.
After the agency changed hands, M.K. served as the agency’s CEO. K.K., who had been a stay-at-home mom, returned to the workplace to serve as the agency’s bookkeeper.
As is the case in many divorces where a business is involved, the spouses disagreed as to the value of the agency. Each presented his/her own accounting expert to support his/her view on the agency’s value. The accountants also presented competing views on the value of the husband’s personal goodwill (the intangible value of his efforts and his business reputation.) The husband’s expert said the agency was worth $2 million and that the husband’s goodwill accounted for 68% of the agency’s value. The wife’s expert testified the value was $4 million and the husband’s goodwill accounted for only 7% of the agency’s value.
Ultimately, the trial judge came down closer to the side of the wife, accepting her expert’s 7% figure for the husband’s goodwill and assigning a value of $3.2 million to the agency.
A Valid Business Valuation Must Factor in Assets and Liabilities
The husband appealed and achieved some relief. He correctly argued that the trial judge made a critical error in determining the value of the insurance agency. Florida law says that, in determining the value of a business in a divorce case, the trial court “must consider all of the company’s assets and all its liabilities.” In this case, the court’s $3.2 million figure represented the agency’s assets, meaning that the court excluded from its number all of the agency’s liabilities. When this happens, this is an error that can permit a spouse to obtain a reversal.
The husband also successfully attacked the wife’s expert’s methodology for calculating goodwill. The wife’s accountant calculated the husband’s goodwill using a business valuation index. The problem there was that many of the business sale transactions the accountant used from the index occurred outside Florida and some dated back nearly 20 years. Additionally, the accountant did not reveal whether all of the transactions he used involved insurance businesses. Given that some of the data points were from outside Florida, others were very old and some may have involved businesses in very different industries, there was not enough “competent” evidence to support the 7% goodwill finding.
Dealing with a business in a divorce – especially one where the business value is in dispute – can be very complicated and require a nuanced understanding of the law. Rely on the experienced South Florida family law attorneys at Stok Kon + Braverman to provide you with the in-depth knowledge of business valuation and financial information analysis you need to get a significant edge in your divorce case.
Contact us online or by calling (954) 237-1777 to schedule your consultation.