When it comes to matrimonial matters, the valuation of a spouse’s business assets can often be the most important aspect of the case. Therefore it is imperative that the valuation professional takes into consideration information that goes beyond the numbers, attributes that are reported in the tax returns or the company’s financial records. Often, spouses and their professionals will overlook these attributes as they have always enjoyed the benefits during the tenancy of the marriage, or they may have never been privy to all of the financial aspects of their soon to be ex’s business arrangements. The three fundamental ways to value a business are the Asset Approach, the Market Approach and the Income Approach. However, when performing these analyses it is imperative that the professional considers information that might not be apparent when reading the financial data.
In all three approaches, the professional must understand the full scope of what is to be valued. This portion of the engagement includes meeting with the business owner and the non-business spouse to gain an understanding of the respective spouses’ current lifestyles, compile a schedule of items that are paid personally, items that are paid through the business and reported to the taxing authorities, and items that are paid through the business and go unreported to the taxing authorities. The mere fact that a couple is married does not mean that this union is a mandate that the two spouses are living a similar lifestyle with similar standards of living and beneficial enjoyment. Once a comprehensive list of items relating to the spouses’ lifestyles is complied and agreed to by all parties, the valuation professional must be careful to accurately determine the fair market value of such perquisites; either added back as a normalizing adjustment or included in the working spouse’s W-2, draw or other compensation. Such items might include but are not limited to the following:
