The end of the year is the time for holiday merriment and top 10 lists. As a kid, I used to love to listen to Casey Kasem’s countdown of theContinue Reading Top 10 Posts of 2022
In 2014, I authored a post on this blog entitled Stern Revisited – Using the Shareholder Agreement to Determine Value. I noted then that it seemed that after the Appellate…
Continue Reading You Can’t Disregard the Partnership Agreement When Valuing a Business
Inevitably, when there is a business to value as part of a divorce, the valuation experts will ask for buy/sell and/or shareholders agreements. I often wonder why because quite often,…
Continue Reading STERN REVISITED – USING THE SHAREHOLDER AGREEMENT TO DETERMINE VALUE
We see it all of the time. Your spouse cheated and more than that, spent a lot of money on that #%!@@@ (add your own derogatory word here.) Your say …
Continue Reading Kill The Goose That Laid The Golden Egg At Your Own Peril!
We deal with a fair number of cases where a spouse’s interest in a business has to be valued for equitable distribution purposes. While there are many objective parts of…
Continue Reading (UN)REASONABLE COMPENSATION – AN EASY WAY TO MANIPULATE VALUE IN A BUSINESS VALUATION
Oftentimes I hear from clients that gathering their financial information is the most daunting task they will face during the divorce process. They picture being buried in an avalanche of…
Continue Reading Tracking Finances: There’s a (New Jersey Divorce) App For That.
As a litigant, you can only agree to settle based on what you know. When the other party details their income, assets and liabilities by anwering discovery and producing documents…
Continue Reading Setting Aside the Settlement Agreement When New Evidence Comes to Light
Oftentimes, when a party to a divorce action is a partner in a small company or partnership, suspicion falls to the other partner or business. I am often told by my client that he or she is sure that the other partner is helping hide money or engaging in some behavior in order to lower the value of, or the income from the company. Not surprisingly, the question then arises of whether the company itself or the other partners can be brought into the divorce action. Except in rare circumstances, the answer is generally no.
The rules of court govern when a non-spouse can be joined to a divorce action. First, in order to bring in a non-spouse, the moving party must show that the company or partner is what is known as an “indispensable” party. According to Mustilli v. Mustilli, 287 N.J. Super. 605, 607 (Ch. Div. 1995), “courts are free to refuse leave to amend when the newly asserted claim is not sustainable as a matter of law. In other words, there is no point to permitting the filing of an amended pleading when a subsequent motion to dismiss must be granted.” This means that a corporate party may only be joined if it would be difficult, if not impossible for the case to proceed without the addition of the corporation. This is usually not the case. Even when the company or other partners are not actual parties to the divorce action, the Rules of Court provide ample mechanisms for litigants to obtain discovery from non-parties, see, e.g., R. 1:9-1 (issuance of subpoena to non-party for attendance of witness); Rule 1:9-2 (issuance of subpoena to non-party for production of documentary evidence); Rule 4:14-7 (issuance of subpoena to non-party to conduct discovery depositions).
The Rules are designed to make sure that all necessary information is available to the court so it can make a fair decision in the divorce. Thus, complete financial records of the company are generally available for review. The rationale behind this makes sense. If at any time it could be said that a company or business partner is an interested party due solely to the fact that one of its members is getting a divorce, it would throw the entire business world into disarray, not to mention an already over-taxed family court system.Continue Reading Concerns About the Actions of a Business Partner in Divorce
A few weeks ago, I posted a piece on this blog about the business valuation concept known as reasonable or replacement compensation. After that post, I received an email from a well known business valuation expert, Sam Rosenfarb of Rosenfarb LLC, with an attachment containing an article that he wrote regarding the issue of the change of value of a business after the date of Complaint for Divorce. That article along with the ever growing backlog in the family courts created by the budget crisis and other factors got me thinking more about this topic. In some counties, it may be more than three years to get a trial date at this time.
Why is this important? In New Jersey, passive assets (e.g. real estate, bank accounts) are typically valued as of the date of distribution. On the other hand, active assets, such as a business, where the value could be tied to the efforts of the business owner, are typically valued as of the date of the divorce Complaint. As such, in your typical case, the increase or decrease in value post-complaint is not considered though there is an ability to raise the issue in extreme circumstances.
This issue was relevant in a case that both Sam and my prior firms were involved in where it took nearly a decade for the case to get to trial and where the business increased in value substantially over that time. That case started before New Jersey implemented "Best Practices" wherein, systemically, the goal was to get all cases resolved in a year. Even cases that were more complicated and which had business valuation issues, could usually get a trial date within 18 months. As such, the days of the 4 year, 5 year or longer case, where changes in value would likely occur, became less the norm as they had been before "Best Practices."Continue Reading Changes in the Value of a Business Post-Complaint
In divorce cases, where one or both spouses own a business, the value of the business for equitable distribution purposes is often one of the more difficult issues to resolve in the case. When these issues arise, the Court may appoint an expert. the parties can agree on a joint expert, or each party may retainer their own expert to value the business. While there are many objective parts of a business valuation report, reasonable (a/k/a replacement) compensation is subjective. Why is it important? Because the higher the reasonable compensation, the lower the value of the business and vice versa. As such, when there are partisan experts, it is not unusual for these subjective factors to favor the party that the expert is working for.
For divorce purposes,as well as many other situations where businesses are valued, they are valued based in whole or part on their income. Reasonable compensation is a consideration in two valuation methods often seen in divorce cases – the excess earnings method and the capitalization of earnings method. These methods involve examining earnings available to a potential hypothetical buyer after he or she receives a "reasonably compensation" for running the business. Earnings available, beyond
"reasonable compensation" are a large factor in valuation. The higher this figure is, the more the business may be worth. In the excess earnings method, the difference between actual compensation and reasonable compensation is capitalized and for all intents are purposes represents the "intangible asset" known as good will of the business.Continue Reading Reaonable Compensation/Replacement Compensation – What it Means to Business Valuation