While a high net worth marriage may contribute to a comfortable standard of living, this factor can make divorce proceedings far more complicated. One of the most challenging aspects of any New Mexico marital dissolution involves the division of assets and property. The complexity involved in the distribution of assets between the parties to divorce is compounded in high net worth divorce cases because there are likely to be more assets with values that are difficult to ascertain. Frequently, experts are needed to assist in the process of determining the value of these assets, but there may be multiple valuation methods used by opposing experts. One of the most difficult assets to evaluate in a New Mexico divorce is a family business.
A commercial enterprise can be a difficult asset to evaluate but also the asset with the highest worth. When the parties cannot agree on the value of the business, business valuation experts frequently must be used. The most cost-effective way to use a business valuation expert is when the parties can agree on an expert that they believe will be impartial in make a valuation. Sometimes each party will have an expert who may employ competing methods of determining the value of the business. These cases may be complicated by attempts of either party to hide business assets or income.
Key Business Evaluation Methods in Divorce
There are three methods typically used to value a business, but they may result in widely divergent opinions in term of the value of a business: (1) income approach, (2) market approach and (3) asset approach. While all of these approaches should be considered by a business valuation expert, the circumstances of a particular case will determine which method is most appropriate. Our New Mexico Divorce Attorneys advocate for the approach that is most advantageous to our clients.
Income Approach: The income approach usually is most appropriate for privately held businesses. This valuation method generally involves projecting future economic benefits to the business and reducing them into a specific aggregate amount based on one of several approaches. The business evaluation expert may employ the discounted cash flow approach, the capitalized cash flow approach or the excess cash flow approach. These approaches estimate the future anticipated income stream in light of the rate of return (i.e. risk) that the income will actually be realized. The expert in making these determinations will look at historical financial data for the business and make normalizing adjustments. One common adjustment involves situations where the primary business shareholder will pay himself or herself an inappropriately high salary. This compensation level will be adjusted down and the excess will be factored back into the business income stream.
Market Approach: This approach is most easily understood as analogous to the way you may have sold your home. The business is compared to similar businesses that have been sold with adjustments in price being made to compensate for the differences between the businesses. This method of evaluation may be unrealistic if there are insufficient market comparisons that can be used in evaluating the business. When the business is a small closely held family business, there are many factors that complicate comparisons to a larger publicly held sale which may be the only types of comps available.
The Asset Approach: This business valuation approach involves determining the value of all tangible and intangible assets less business liabilities. This is a much more complicated process then it seems because assets like intellectual property or goodwill may not be easy to value. Other assets like equipment and real property may also not be fairly reflected by “book value.” Book value is the value of an asset less depreciation (i.e. value carried on a balance sheet). This valuation approach is most appropriate with new businesses that have little goodwill or professional practices that may not have significant intellectual property.
The above information is designed to illustrate general principles of law, and does not constitute a specific legal opinion on individual cases. If you are involved in a divorce involving parties with high net worth and/or ownership interests in a closely held company, the financial stakes make it essential to seek legal advice promptly. We suggest that you contact experience legal counsel for a specific opinion tailored to your individual circumstances. Call us today to schedule your free consultation at (505) 989-8117 to learn about your rights.