New Jersey law makes businesses owned by a spouse subject to potential claim and division in a divorce case. Part of the process involves fixing a present value to the business interest. Covid-19 will most likely impact the valuation of your family-owned business during your divorce proceedings.
There are three methods of value generally used in divorces. The first is to compare the business to others that have been recently sold. A second method is to value hard assets, if the business is primarily a hard asset company. The third method is to determine the present value — a specific sum of money — equal to the expected future earnings of the business.
The first two methods are fairly “scientific.” If the business is a Wawa, and fifty stores have sold in the last year, we have a fairly solid idea as to value. The second method is fairly reliable as well; if the company owns five million dollars of heavy equipment, KBB or other sources tell us, with a high degree of accuracy, the worth of the hard assets.
While all of these valuation methods have been impacted by Covid-19, no method has been as dramatically impacted as the third as described above, what is referred to as the “income” approach. This is the case since the methodology to determine future earnings is based on a review of income earned during the prior three to five years, or longer, depending on the nature of the company. As we all know, past earnings are not a fair indication of the future with Covid-19; look at the airline industry, the hotel industry or even Disneyland.
Accountants, attorneys and judges are now struggling with these realities in cases involving businesses. It is vital to hire an attorney with significant experience in business valuations and trends in valuation if your marital estate includes assets of this nature. One misstep or a failure to properly consider the unpredictable impact of global events might cost either party thousands or millions.