When Business Partners Split

PREPARING FOR THE SPLIT

In divorces involving business partners, Herman recommends employing a sound lawyer and tax accountant. If the business will conceivably be a main issue in the divorce, find an attorney who has experienced similar cases first hand.  “Generally the business is the goose that lays the golden egg and you don’t want the divorce to destroy the business,” he said. “You want your lawyer consulting with your tax accountant in terms of how to structure the buyout and to make sure you have no unanticipated tax consequences.”  

Similar to a house appraiser, there are specialist trained specifically to appraise businesses. There are several reasons a person might need to have a business appraised, divorce is one of them. “There are business appraisers … their job is to value businesses,” Herman said. “Most are CPAs. Their job is to exam businesses and derive an opinion. They are not nearly as accurate as real estate appraisers. I know of cases where they have been significantly off but most good accountants tend to give a range. They certainly are not perfect.”  

Barney said finding a trustworthy business appraiser doesn’t have to be difficult. Barney, who is a Certified Machinery and Equipment Appraiser and a Certified Valuemetrics Business Appraiser, has appraised more than 1,500 small businesses during his career. Barney said when seeking an appraisal, it is important to use individuals who operate under the Uniform Standards of Professional Appraisal Practice (USPAP). “Anyone contemplating a settlement should require USPAP standards,” Barney said.  

When done correctly and ethically, Barney said business appraisals are sound conclusions. “The appraised value is the most probable value the appraisal can come up for what is called a fair market value,” he said. “A business appraisal is a defensible opinion of value.”  

In general, appraisals come in the form of a range. “The ranges we use are pretty standard,” Barney said. A range is formulated using the fair market value. The bottom end is minus 10 percent of the value and the top end is 15 percent of the value. Therefore, a business with the fair market value of $100,000 has a range of  $90,000 to $115,000. “What that doesn’t factor in is the motivation of the buyer,” Barney points out.   


CONFUSION ABOUT ASSETS

Barney also said there tends to be a lot of confusion around the terms assets and equity. In short assets include property that has positive financial value. Equity is the assets minus the claims held against the assets. In certain cases, the appraiser must consider the value of a company’s equity. “That requires an equity appraisal. That is not always easy,” he said. This generally occurs with smaller business and sole proprietorships that don’t maintain balance sheets.  

For example, an individual who works as a contractor may not separate business and personal finances. “The company doesn’t own anything per se that he doesn’t own,” Barney said. “It is very hard to determine what the equity is.”  

Guralnick recalls a case involving a deputy attorney general and a high-profile patent lawyer. “The wife was a patent lawyer who had, over the course of their marriage, garnered some great clients,” he said. While the wife garnered approximately $500,000 in annual salary, her husband –- the deputy attorney general –- matched her income by one one-fifth. “The husband claimed interest in the patent business,” Guralnick said. “The wife said the practice was worth $100,000. We said it was worth half a million and the judge ruled it was somewhere in between.”  

While a client may be inclined to go with the first business appraiser his or her attorney recommends, Barney suggests otherwise. “My advice to people who are in this situation, do a little shopping for an appraiser,” he said. Overall, Barney said an appraisal for a small business should run between $2,000 and $4,000. However, he has seen people charged as high as $10,000 to $15,000. “Get quotes, there are a lot of appraisers on the Internet,” he said. “The appraiser doesn’t have to see the business to appraise it.”  

Barney said the turnaround time on an appraisal can vary. His firm has a streamlined system that offers appraisals in about a week. Other appraisers, however, can take up to two months to complete a report. While many are unfamiliar with the concept, both Barney and Guralnick point out that a business has what is known as goodwill value. Any business has, in addition to its physical assets, a very valuable asset known as good will,” Guralnick said. “You can argue there is some intangible, even an intellectual value.”  

For example, in a May 1989 ruling, New Jersey lawyer Charles Abut successfully argued that an entertainer’s celebrity status might generate future business. Abut represented the former wife of comedian Joe Piscopo. The ruling granted Nancy Hayes 48 percent of Piscopo’s goodwill in addition to 48 percent of Piscopo Productions’ stocks. According to Guralnick, the same concept can apply to business owners. “It’s a great argument point for lawyers,” he said.   Barney agrees with Guralnick. “It’s a very common phenomena in very small companies,” Barney said. “The value of the business is really professional goodwill. This is one of the most bitter pills in divorces.” 


Casey Clark Ney holds a B.A. in communication and has more than six years experience in newspaper and magazine writing. Her Web site can be viewed at www.CaseyClarkNey.com. E-mail correspondences can be sent to caseyclarkney@earthlink.net.