complex property and asset issues in divorce: business...

Complex Property and Asset Issues in Divorce:

Business Valuation and Equity Rights

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THURSDAY, JUNE 20, 2019

Presenting a live 90-minute webinar with interactive Q&A

Patrick (Leh) Meriwether, Partner, Meriwether and Tharp, Atlanta

Victoria Snell, Attorney, Meriwether and Tharp, Orlando, Fla.

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COMPLEX PROPERTY AND ASSET ISSUES IN DIVORCEBUSINESS VALUATION AND EQUITY RIGHTS

Patrick “Leh” Meriwether145 Towne Lake Parkway, Suite 300

Woodstock, GA 30188

[email protected]

Victoria Snell941 West Morse Blvd, Suite 100

Winter Park, FL 32789

[email protected]

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OUTLINE

Business Valuations

General Principles of Business Valuations

Separate / Pre-marital values of a business

Transferring value between spouses

Stock Options

Definition

When are they marital property

How to value them

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BUSINESS EVALUATION OVERVIEW

Levels of Opinion Offered

Documents Needed for a Business Valuation

Evaluating Appraisals from Opposing Experts

Handling Pre-marital Businesses

Transferring value between spouses

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TYPES OF OPINIONS OFFERED BY APPRAISERS

Calculation of Value

Less in scope than a full business valuation.

Typically comprised of a Market Approach.

Not reliable if underlying company not comparable to industry average.

May not be appropriate for all industries.

May not be appropriate for trial.

Business Valuation

Includes all steps (including those undertaken in Calculation of Value).

More costly than a Calculation of Value.

Generally required to fully evaluate owner compensation.

Necessary for unusual industries.

Necessary if opposing expert presents an opinion.

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DOCUMENTS NEEDED FOR A BUSINESS VALUATION

Short Form

Sufficient for most valuations.

Does not include bank statements or credit card statements.

Does not include invoices.

Does include general ledgers.

Long Form

Mostly used for very litigious cases.

Includes all items found on short form.

Includes bank statements and credit cards.

Includes all items generally needed to uncover intentional misstatements.

Requests copies or access to all client and vendor invoices.

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1. Current electronic copy of the Company’s QuickBooks accounting file (saved as either a QBW or QBB file) including any relevant username and password, ifapplicable.

Note: If the QuickBooks file is not provided or inaccessible we will need the following: Annual financial statements (balance sheet and income statement) for the last 5 years (accrual basis where available). Year-to-date financials statements (balance sheet and income statement) as of the most recent month end (accrual basis where available). Detailed general ledger reports by year for the prior 5 years. Report showing sales by month over the preceding 36 months. Aged accounts receivable listing as of the most recent year end and as well as for the most recent month end. Aged accounts payable listing as of the most recent year end and as well as for the most recent month end.

2. Federal income tax returns (and state returns, if applicable) for the last 5 years.

3. Forms W-2 for all owners and officers for the last 5 years.

4. Payroll report showing gross year-to-date wages paid to all owners and officers.

5. Payroll report showing gross 2017 wages paid to each employee.

6. County business personal property tax return for the most recent filing period.

7. Copies of any forecasts or projections prepared during the last 5 years.

8. Current list of items comprising inventory (quantity, description, and cost) and information on inventory accounting policies.

9. Fixed asset register or depreciation schedule as of the most recent year end and as well as for the most recent month end.

10. Reports of other professionals obtained in the last 5 years including, but not limited to, appraisals, consultant reports, etc.

11. List of any of the following: patents, copyrights, trademarks, or similar intangibles.

12. Details of any contingent liabilities (such as guarantees or warranties) or off balance sheet financing (such as letters of credit).

13. Copies of stockholder, member, or partnership agreements, including any stock option agreements.

14. Copies of any buy-sell agreements and/or written offers to purchase or sell company stock.

15. Details of transactions in the company's stock during the last 5 years.

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1. Current electronic copy of the Company’s QuickBooks accounting file (saved as either a QBW or QBB file) including any relevantusername and password, if applicable.

Note: If the QuickBooks file is not provided or inaccessible we will need the following: Annual financial statements (balance sheet and income statement) for the last 5 years (accrual basis where available). Year-to-date financials statements (balance sheet and income statement) as of the most recent month end (accrual basis where available). Detailed general ledger reports by year for the prior 5 years. Report showing sales by month over the preceding 36 months.

Aged accounts receivable listing as of the most recent year end and as well as for the most recent month end. Aged accounts payable listing as of the most recent year end and as well as for the most recent month end.















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1. Current electronic copy of the Company’s QuickBooks accounting file (saved as either a QBW or QBB file) including any relevant username and password, ifapplicable.

Note: If the QuickBooks file is not provided or inaccessible we will need the following: Annual financial statements (balance sheet and income statement) for the last 5 years (accrual basis where available).

Year-to-date financials statements (balance sheet and income statement) as of the most recent month end (accrual basis whereavailable).

Detailed general ledger reports by year for the prior 5 years. Report showing sales by month over the preceding 36 months.

Aged accounts receivable listing as of the most recent year end and as well as for the most recent month end. Aged accounts payable listing as of the most recent year end and as well as for the most recent month end.















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VALUATION APPROACHES

Asset Approach

• FMV of assets less liabilities

• Minimum value

• Not same as book value

Income Approach

• Present value of future cash flows

• Requires adjustment to officer wages

• Requires add back of all personal expenses

Market Approach

• Based on comparable sales

• Often misapplied by valuators

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Asset Approach- Makeshift Example

Add: 16,500 (D)Add: 1,277,617 (D)

Add: 0 (C)

Add: 335,330 (B x 50%)

Subtract: 0 (A)

Equals: 1,629,447

XXXXXXXXXXXXXXXXXXXXXX

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Income Approach

Note: Cash flows for Income Approach are after reasonable market salary for owner/operators.

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RULES OF THUMB

Industry % of Annual Sales

Accounting/Tax Practice 100% - 135%

Auto Body Repair 25% - 35%

Bakery 40% - 45%

Beauty Salon 35% plus fixtures & equip.

Building Construction 20% - 30% plus inventory

Chiropractic Practice 55% - 60%

Computer Services 55% plus fixtures & equip.

Dental Practice 60% - 70%

Dry Cleaners 70% - 80% plus inventory

Heating & Air Contractors 25% - 40% plus inventory

Insurance Agency/Broker 150% - 200%

Industry % of Annual Sales

Lawn Maintenance 50% - 60%

Maid Services 35% - 40%

Manufacturing 40% - 60%

Optometry Practices 60% - 70% plus inventory

Pharmacies 20% - 30% plus inventory

Physical Therapy 60% - 75%

Property Management 100%

Real Estate Brokerage 33%

Restaurants 20% - 35%

Retailer 30% - 35% plus inventory

Veterinary Practice 70% - 75%

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VALUATION DISCOUNTS AND WHEN TO APPLY THEM

Discount for Lack of Control (aka Minority Interest Discount) – Accounts for less than 50% of ownership.

Typically between 15% and 30%.

Discount for Lack of Marketability – Accounts for illiquidity of stock (i.e. how quickly and certainly an investment can be converted into cash).

Typically between 20% and 25%.

May not be applicable for all approaches.

Key Person Discount – Accounts for company’s dependence on one person.

Generally accounted for by means other than applying a companywide discount.

Discount for Customer Dependency – Accounts for concentration of sales in one or few customer or relationships.

Can be as high as 100%.

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PERSONAL GOODWILL (SEPARATE OR MARITAL)

Goodwill is an intangible asset usually composed of elements such as brand recognition, customer patronage, location, products and similar factors.

Goodwill = Fair Market Value minus Asset Value.

Personal Goodwill is the goodwill that attaches to the persona and personal efforts of an individual vs. Enterprise Goodwill.

[E]nterprise [or commercial] goodwill ... is transferred whenever the enterprise to which it attaches is bought and sold ... as an ongoing concern.... [I]ndividual [or personal] goodwill ... is not transferable when the enterprise is bought and sold, and ... instead resides primarily in the personal reputation of the owner. The strong general rule is that enterprise goodwill must be included when valuing a business entity [as marital property]. 2 Brett R. Turner, Equit. Distrib. of Property, 3d § 6:73

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VALUATIONS FROM OPPOSING EXPERT -POINTS TO CONSIDER

Asset Approach Income Approach Market Approach

• How were fixed assets valued? (income tax basis, property tax basis, etc.)

• What adjustments were made to officer compensation?

• How many comparable transactions were found?

• What personal expenses were added back?

• Often misapplied by valuators

• What discount rate was used?

General Questions

1. Calculation of Value or Full Business Valuation?2. Where all 3 approaches considered? If not, why?3. Are indicated values from Income Approach and Market Approach consistent?4. Explain all discounts applied, if any.5. How was Personal Goodwill Accounted for?

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PRE-MARITAL BUSINESS

Is there a Prenuptial Agreement?

Burden on Business Owner?

Valuation at time of Marriage -

Personal net worth statements prepared by owner? Longer marriage, harder to find.

Formal valuation based on information at hand.

Valuation at time of Divorce -

Argue the marital contribution of the parties.

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HOW TO TRANSFER SOME OF THE VALUE BETWEEN SPOUSES

Offset the value with another asset

Cash option

Payment over time from business profits (gross/net) – Pros and Cons

Payment over time through financing – Pros and Cons

Split the business into two businesses

Both spouses stay in the business and they draft a detailed operating agreement that details how they will resolve disputes, buy the other out, or when to sell/close the business.

Other creative options?

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QUESTIONS?

TELE: (404) 236-0353

Special thanks to Seth Murphy, CPA/ABV, CFE - http://murphycpa.org/about.html

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STOCK OPTIONS

Employee Stock Option (“ESO”): contractual employee benefit provided by an employer to an employee to buy a share of stock at a predetermined price.

Strike/Exercise Price: The purchase price at which an employee is permitted to exercise an ESO; generally lower than the actual stock price.

Usually to exercise, there is no actual cash outlay by employees.

Usually there is a total grant, which vests as an employees reaches certain temporal milestones.

For example, an employer might grant an option to buy 1,000 share, which vest 200 shares per year for five years, with a proviso that if the company is sold all options vest immediately.

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STOCK OPTIONS (CONTINUED)

Grant Date: Start date for vesting period for stock option.

Expiration Date: Date by which stock option must be exercised.

Taxation: Depends on form of stock—incentive versus non-qualified.

For Incentive, no tax until sale, and then capital gains tax is applied.

For non-qualified, taxed as regular income at exercise.

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STOCK OPTIONS – MARITAL OR SEPARATE?

Stock options require special analysis concerning equitable division.

As a general rule, property is subject to equitable division if it was:

acquired as a direct result of the labor and investments of the parties; and

Acquired during the marriage.

Generally speaking, pre-marital assets that increase as a result of market forces are not subject to equitable division.

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STOCK OPTIONS – MARITAL OR SEPARATESCENARIOS

Problem Scenarios -

Scenario 1 - Stock options are granted and vest prior to marriage, but are exercised after the parties are married.

Scenario 2 - Stock options are granted prior to the marriage, but vest during the marriage.

Scenario 3 - Stock options are granted during the marriage, but vest after the divorce.

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STOCK OPTIONS – MARITAL OR SEPARATE –SCENARIO 1

Stock options are granted and vest prior to marriage, but are exercised after the parties are married.

Separate property, unless:

Cash deposited into joint account and can be argued gift to marriage.

They exercise the option with marital funds and hold onto the stock.

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STOCK OPTIONS – MARITAL OR SEPARATE SCENARIO 2

Stock options are granted prior to the marriage, but vest during the marriage.

Depends on at what point during the marriage they vest as to whether they are completely separate or there is a marital component.

Were marital funds used to purchase and keep the stock at the reduced price?

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STOCK OPTIONS – MARITAL OR SEPARATE –SCENARIO 3

Stock options are granted during the marriage, but vest after the divorce.

2 problems here – Timing of grant and vesting . . . Speculative nature of their future value.

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STOCK OPTIONS – HOW DO YOU VALUE THEM?

Granted, vest and exercised during the marriage.

Granted prior to marriage, vest during marriage.

Purchased with marital funds.

Granted during marriage, but vested after divorce.

Speculative nature of their future value makes them separate property?

Using a Constructive Trust for a future division?

Scenarios

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QUESTIONS?

Leh Meriwether www.mtlawoffice.com // Victoria Snell www.floridadivorcelawfirm.com

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