Our country is built off of the success stories of small business owners and entrepreneurs. We encourage people to blaze their own trail and offer financial incentives to those individuals who find success in these endeavors. More and more, we find couples starting new businesses as a team, combining their expertise to pursue their passion. What happens, then, when the couple divorces?
In most cases, one of the parties will purchase the other’s interest and continue on managing the company. This process should always, if nothing else, include hiring the expertise of a business appraiser to value the business. This appraisal will be used to determine how much cash or value in assets must be exchanged in order to buy-out the spouse exiting the business. Anytime a business is involved in the divorce process, it is important to keep in mind that the process of valuing a business is considered more of an art than a science. If you were to hire two business valuation experts, you are almost guaranteed to receive two different valuations in return. As a result, we encourage clients to remain flexible when negotiating a buy-out settlement. In all likelihood, a business valuation 12-months after the settlement date will provide a very different picture, whether good or bad.
However, only you and/or your business partner(s) are fully aware of not only the current cash flow, but also any future potential cash flow that may be necessary in correctly valuing the business. You must be aware of the on-going business practices to ensure you get what is rightfully yours.
All too often we hear about cases where one party feels they were left short changed. Take for example, the McCourt family in Los Angeles. During their divorce, the McCourt’s were the majority owners in the Los Angeles Dodgers Major League Baseball team. When the settlement was awarded in 2011, the wife, Jamie McCourt, was awarded $131,000,000 in cash and several pieces of real estate. The husband, Frank McCourt, retained interest in the Dodgers together with the stadium and surrounding parking lots. Shortly after the divorce settlement was reach, Frank sold his portion of the family business (LA Dodgers) for $2,000,000,000. Needless to say, Jamie was not pleased with this result and later contended that Frank intentionally misled her about the value of the family business.
The biggest complication in this case came from the valuation of the Los Angeles Dodgers and their ongoing business deals. At the time of the settlement, the team had listed $1,000,000,000 in assets and $500,000,000 in debt. On the surface, Jamie should be very pleased with her original settlement, as it is unlikely she would have come out with $131,000,000+ after taxes and fees. What was not accounted for in the bankruptcy filings; however, was the potential future value of the broadcast rights.
In a later court decision, they disagreed with Jamie’s request to throw out the initial settlement, stating that, paraphrased, ““Jamie McCourt had the information, knowledge, experience and evidence that the value of the Dodger assets was greater than what she indicated in her moving papers which she relied upon in entering into the settlement of this matter. Further, there is no credible evidence that Frank McCourt misrepresented the valuation to her in this case.”
Here are a few questions that Jamie, and others like her, should be sure to ask before signing on the dotted line of the settlement:
- How would you feel if the family business sold for significantly more than the agreed upon amount in the future?
- Could you foresee yourself regretting this decision?
- Is the settlement enough money to support your lifestyle moving forward and through retirement?
- Is that a relevant question?
- Lastly, always try to evaluate the costs, both financially and emotionally, of making this decision.
Decisions such as these could play a significant role in your post-divorce future. Hiring an experienced CDFA will ensure a more secure, comfortable future for YOU. Make sure you sit down with us at PDM before finalizing your settlement agreement.