Matrimonial Valuations: Is it "Divorce Planning" or the Economic Downturn?

August 2011

Many matrimonial disputes require the valuation of one or more business interests, so that the parties’ total assets – including savings, investments, real estate, retirement assets, and businesses – can be quantified and distributed to the parties. The rules and guidelines pertaining to the valuation of businesses in the context of a divorce action vary from state-to-state. Nevertheless, for many years, divorce attorneys, forensic accountants and valuation experts implicitly understood an owner-spouse rule: if you own the business, you want its value to be as low as possible. For forensic accountants/valuation experts, it was therefore important to look for signs of “divorce planning” by the spouse who owns the business. Have revenues declined in the period prior to the divorce? Have expenses increased? Are liabilities higher than in the past? Are receivables and inventory lower? An experienced expert – through a diligent review of the business’s underlying books and records – could identify signs of “divorce planning” and adjust the financial profile of the company to reflect a more normal state of operations and therefore a reasonable and supportable valuation.

Since late 2008, many but certainly not all U.S. businesses and professional firms have been affected by the economic downturn. Companies as diverse as restaurants and manufacturers, consulting firms and hedge funds, have experienced a decline in revenues and profits, deterioration of their balance sheets, and increased risks associated with industry, national, and even global economic conditions.

The challenge facing the valuation expert is to properly diagnose the key factors or “drivers” affecting the business’s value as of the relevant date. If an owner-spouse has deliberately and adversely affected the business’s financial performance, then proper adjustments must be made to reverse the negative impact of his/her actions. However, if economic factors have legitimately had an adverse impact on the business, then its value will be justifiably lower than it otherwise might have been.

In several recent matrimonial cases, our valuation team has identified various “divorce planning” transactions that had an artificial, negative impact on the business, including:

• The deferred recording of sales;
• Accelerated payment for purchases, resulting in the overstatement of expenses;
• Reserves for collectability of receivables from certain clients, notwithstanding the fact that their payment history is unchanged; and
• The unnecessary write-down of inventory.

In other recent cases, we have analyzed and convincingly argued that various businesses – from construction companies to hedge funds – have experienced a material decline in value due to economic factors, including:

• Loss of key customers due to bankruptcy and other factors;
• Skyrocketing insurance costs reducing profit margins;
• Loss of business as key customers bring services in-house rather than retaining service firms; and
• A decline in assets under management, combined with reduced management fees and other “give backs” to investors, for investment management and hedge funds.

If you have questions or concerns about valuations for matrimonial proceedings, or are interested in speaking with us about this topic, please contact Joan A. Lipton, a partner in our Forensic, Litigation & Valuation Services group, at 646.375.3845 or Joan.Lipton@ParenteBeard.com.