Arizona Divorce and Business Assets FAQS

When is a business appraisal necessary in an Arizona divorce case?

A business appraisal is necessary whenever either spouse has an interest in a business, whether that interest was acquired prior to or during marriage. Although property owned by either spouse prior to marriage is generally considered to be that spouse’s separate property, the other spouse may acquire a community property interest in that business if community effort (i.e., labor expended on the business by a spouse during the marriage) was expended to operate or improve that business.

Why isn’t the value of the business simply the difference between the debts owed by the business and the assets owned by the business?

The difference between the debts owed by a business and the assets owned by that business almost never accurately estimates the value of a business. For example, the net assets held by the business typically have no direct relation to the income earned by the business owner, which is perhaps the most significant factor determining the value of a business. Another problem exists with the net book value approach because it often results in a low appraised value because assets are typically listed at a value far below their actual current fair market value because certain acceptable accounting procedures allow for the accelerated depreciation of certain assets.

How is a company’s value defined in an Arizona business evaluation if it isn’t necessarily the book value listed on the company’s balance sheet?

There are several definitions of value; all of which may result in materially disparate estimations of value. Each definition of value, correspondingly, is based upon certain specific assumptions. Understanding the definition of value used by a business appraiser is crucial, therefore, to ensuring a fair representation of the value of a community business is established. Generally, the most common definitions of value include book value, liquidation value, investment value, fair value, and fair market value. Depending upon the circumstances, the arguably most appropriate definition of value to be used by an appraiser in a divorce case would be either fair value or fair market value.

My spouse pays his personal expenses through the business, but does not claim those expenses as income on the income tax returns. Will the appraiser look beyond the business’ financial statements to evaluate the income of the business?

A business appraiser will ask to review the business’ financial statements. Reviewing those financial statements is necessary for the business appraiser to determine the income earned by the business. Most businesses are only as valuable as their ability to produce income that exceeds the obligations of the business. The value of a business, therefore, is heavily reliant upon an evaluation of the income and expenses of the business. Any accounting procedures that artificially increase the expenses of the business or artificially decrease the reported income of the business will have an impact on the appraised value of that business. A competent business appraiser will almost always evaluate the accuracy of the business’ financial statements. The extent of that evaluation, however, may be strongly influenced by the information provided by the attorneys at the beginning of the business appraisal process. It is critical, therefore, for your attorney to understand the business’ financial statements to allow him or her to provide appropriate instructions to the appraiser regarding the need to further evaluate those financial documents before relying upon them without question during the business appraisal process. Too often, an attorney will wrongfully believe his or her job is complete after having hired a competent appraiser. However, that business appraiser will rely upon the attorneys to inform him of the appropriate definition of value to be used in the appraisal, as well as to point out any expected inaccuracies or inconsistencies in the business’ financial statements that are being used in that business appraisal.

How do you decide who to hire as a business appraiser?

Unlike most professionals, business appraisers come from a variety of professions and include accountants, business brokers, and investment advisors. A degree or experience in any of these professions, however, does not make such a person qualified to conduct a business appraisal. Several accrediting boards have been created in an effort to standardize the practices and procedures used by business appraisers and to ensure some minimum levels of competence. You should always consider the credentials of a business appraiser before retaining him or her to conduct a business evaluation on a community business. Some of the more recognized credentials include the Accredited in Business Evaluation credential granted by the American Institute of Certified Public Accountants, the Certified Valuation Analysts credential granted by the National Association of Certified Valuation Analysts, the Certified Business Appraiser credential granted by the Institute of Business Appraisers, and the Accredited Senior Appraiser credential granted by the American Society of Appraisers.

Can I use the company certified public accountant to perform the appraisal?

It is not typically a good idea to use the company accountant to conduct the appraisal on the business. The most obvious concern is that the accountant may not have the specialized education, training, or experience necessary to competently conduct the business evaluation and appraisal. By way of example, only 1% of Certified Public Accountants have earned the Accredited in Business Evaluation credential granted by the American Institute of Certified Public Accountants. Another not so obvious concern pertains to a potential conflict of interest when the accountant who prepared the business’ financial statements is asked to question the accuracy of those same records during the business evaluation.

What factors, other than income and expenses, does a business evaluator and appraiser consider when conducting the business appraisal?

A competent appraiser will consider many factors before rendering an opinion regarding the value of a business. Some of those factors are objective and, therefore, fairly and easily quantified, while others are highly subjective and subject to significant argument and debate. Regardless of the existence of some differences of opinion regarding the appropriate methodology to be used to conduct a business appraisal in a divorce case, most experts would agree a competent appraisal would, at a minimum, include the following:

1. Consideration of the economy and how that economy impacts the business
   being valued;
2. Consideration of the industry in which the business operates;
3. Obtaining important information from the owners, managers, and employees of the business concerning the operations of the business, including the accounting procedures used by the business;
4. Investigating the historical operations of the business and evaluating the strengths, weaknesses, opportunities, and threats to the business in the future, commonly referred to as a S.W.O.T. analysis;
5. Evaluating the financial strength of the business, including an analysis of the liquidity and profitability of the business;
6. Projecting future profits and opportunities, as well as the company’s ability to meet those opportunities;
7. Researching other companies’ sales multiples from the prior sale of publicly and privately sold companies in the same or similar industries;
8. Evaluating the business appraiser’s conclusion through what are commonly referred to as sanity checks;
9. The submission of a final written report.

Contact us today or call us at 480-305-8300 to schedule your consultation with AZ divorce attorney Christopher S. Hildebrand regarding divorce and business assets or any other Arizona family law matter.