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| Home > Divorce Q&A's: (sect-Property Issues in Divorce) > Business Valuation | |||||
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Business Valuation and Divorce in IllinoisThe Gitlin
Law Firm, P.C., Woodstock, Illinois © 2009
Q:My business was started during the marriage, but it is a corporation and has only been in my name. Is the business marital property?A:Yes. Illinois defines marital property as all property acquired during the marriage with certain exceptions (such as property acquired by gift or inheritance). Click here to see a discussion of property distribution in an Illinois’ divorce. Therefore, if a business was started during a marriage, it is considered to be marital property and to the extent that there is a value to this business, it is subject to what is called “equitable division.”
Q:My business is worth more than all of the other assets of the marriage put together. How would the court handle this situation?A:While the business is considered marital property, what generally occurs is a “structured property settlement.” In such a settlement, the offsetting value of the business is paid to the other party over time. Often a settlement is negotiated under which the offsetting payment will be paid over a number of years.
Q:How is the value of the business determined?A:The court looks to the fair market value of the business. This is a hypothetical number of what the business would be worth if it were sold. Often it is believed that the value of the business is based upon one preferred approach – an income approach. In an income approach the future income stream of the business is discounted back to present cash dollars. There are many critical calculations in using an income approach. A second approach to value a business is a market based approach. Such approaches are quite similar to an appraisal of real estate with three comparables. Therefore, using a market based approach, an evaluator focuses on sales of similar businesses. A third approach to valuing a business focuses on the asset based approach and focuses on the assets of the business. To see a presentation which I gave for the American Academy off Matrimonial Lawyer's Institute for Matrimonial Law Associates in June of 2003, click here. This discussion is national in scope.
Q:I have heard about the concept of goodwill of a business. What is it?A:Goodwill has been defined many ways. Often goodwill is defined as the value of a business due to its position, its customers and its ability to produce a profit.
Q:What is the position of Illinois courts regarding the value of a professional practice or a service oriented business?A:This is a complex question. There is a leading Illinois Supreme Court case called Marriage of Talty. In this case, the Illinois Supreme Court (the highest court in Illinois) addressed the problem that occurs because of the potential double counting of the goodwill of a business. The Supreme Court believed that in apportioning marital property the court was to have already considered two factors which might already be part of a goodwill calculation by an appraiser. These factors look to the earning capacity of each spouse. In short, Talty ruled that to the extent that goodwill of a business exists independent of the personal efforts of the business owning spouse, it should be considered as an asset of the business. To the extent that the goodwill of a business depends upon the efforts of the spouse who owns the business, it should not be considered to be marital property. Essentially, the focus in such business valuation cases in a state such as Illinois is to focus upon whether it would be possible to replace the owner of the business with another person and continue to operate the business at the same profit level. Recently, the Illinois Supreme Court essentially reaffirmed its position in the Schneider decision. IRMO Schneider: January 2005.
Q:What is the cost for an appraisal of a business?A:I practice primarily in McHenry County, Lake County and Kane County, Illinois. In these counties, I have handled a number of cases involving business -- with some businesses being small service oriented business to large manufacturing businesses. I have found that most appraisers charge a minimum retainer of approximately $5,000. The cost of the business valuation will ultimately depend upon a number of factors – one of the most significant of which is the degree of cooperation of the spouse who owns the business (or has an interest in the business) with the professional appraiser. The other significant factor is whether it is necessary that the appraiser must do what is called “forensic accounting.” If the books and records of the business are trusted to be accurate, then the cost of an appraisal is significantly lower than a business where the financial statements of the business may not be entirely accurate.
Q:I have heard of the use of a neutral appraiser. What are the advantages and disadvantages of the use of a neutral appraiser?A:The advantage of using a neutral appraiser may be cost. If the parties agree to the use of a neutral appraiser and the appraisal is accepted by both parties, this approach will result in the lowest overall cost. However, as of the time of the writing of this Q&A, Illinois law is not clear as to whether the court has the authority to order the parties to use a “court ordered” business evaluator who is considered to be a neutral witness. Such witnesses are authorized by statute in custody cases, but there is no similar legislation regarding business valuation cases. Because of these reasons, if one party objects to the valuation conclusion by the “neutral” appraiser, the parties may occasionally each obtain their own independent valuation. Therefore, in such a case, the use of a neutral valuation will only serve to increase the cost of litigation overall. A concern about using a neutral appraiser is that such appraisals work best where there is no need to do forensic accounting, that is, where the numbers as stated by the financial statements are trusted by both parties. I do not recommend the use of a neutral appraiser in cases where one party has significant concerns about the accuracy of the financial statements of the business.
Q:Can a case be handled collaboratively if it involves the issue of business valuation?A:Yes. One of the advantages of collaborative law and collaborative divorce is the use of neutral appraisers. The real question is whether the business owning spouse will cooperate sufficiently to ensure disclosure of documentation necessary to value a business. Often the business owning spouse will wish to use a collaborative approach because the parties have more control as to what will happen in a collaborative law setting. For example, often the business owning spouse is concerned that during an on-site visit the other side's expert will inappropriately ask questions of employees, etc. These sorts of concerns can readily be addressed in a collaborative divorce setting.
The Gitlin Law Firm, P.C., provides the above information as a service to potential and current clients. A person's accessing the information contained in this web site, is not considered as retaining The Gitlin Law Firm for any case nor is it considered as providing legal advice. The Gitlin Law Firm cannot guarantee the outcome of any case. The Gitlin Law
Firm, P.C. Gitlin Law Firm, P.C. Updated: January 2, 2009
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