Two out of five American marriages end in divorce. Add to that partnership or shareholder disputes — business divorce — and there are excellent odds that the family firm will be in danger of becoming a divisible asset. Judges have always known that businesses are like babies — worth more undivided. So the age old solution is to evaluate the company’s market price, and let one party retain ownership and pay off the other with half its worth. At this point, the most important person in one’s life may be that business evaluator.
When business evaluators are called in to pave the way for buy/sell agreements, family estates, gifts, or loans, the setting is typically calm. But let that company become a tug-o-war asset in a big breakup, and everything explodes. To provide attorneys and business owners advice on how to handle this volatile situation the New Jersey Institute of Continuing Legal Education presents “Business Evaluations: When You Need Them, When You Don’t” on Thursday, September 28, at 5:30 p.m. at the New Jersey Law Center in New Brunswick. Cost: $139. Visit www.njicle.com.
Speakers include Sharyn Maggio, independent CPA and evaluator in Eatontown; superior court judge Patricia B. Roe; and Abigale Stolfe, an attorney with the Frank Louis Law Office in Toms River.
Maggio, a lifelong native of the Jersey shore, graduated from Monmouth University with a bachelors in business and took her CPA in l987.
That’s the basics, but a competent evaluator better have a lot more letters beyond that CPA. After further study from the American Institute of Certified Public Accountants, Maggio joined the Association of Business Valuators (CVA). She then earned her ASA certification, with emphasis on business valuation, from the American Society of Appraisers. She also is a member and instructor for the National Association of Certified Appraisers.
“Credentials from any of the three groups is a good sign of quality, but evaluating is amazingly complex and takes at least a few years of business accounting experience,” says Maggio. Business valuation is a probing audit of the most severe kind, but there are some controls for the business owner.
Choose your evaluator yourself. Typically a judge will appoint a business evaluator in complicated dispute or divorce cases. But often a quick lawyer can grab the reins and make the selection himself. “When people get this chance, I keep telling them to remember that this is their divorce — not their lawyers’ divorce,” says Maggio. “Lawyers are only going to move when they have to, and choose whom they know.”
Maggio suggests that the individual owner actively help in the selection of an evaluator. Experience in the field and the number of cases handled are, of course, important, but equally so is the evaluator’s experience in testifying. If the business is in some way unusual, for example extremely seasonal, it’s good to have an evaluator who can claim familiarity with its niche — and with the locale in which it operates.
At the same time, it is important to understand that the evaluator is not anyone’s advocate. Yet, as the owner, you want someone whose final figure can weather all assaults from opposing attorneys.
Avoid cookie-cutter evaluation tools. It is a myth that evaluators have some sacred formula into which they mercilessly cram each business. There is no one-size-fits-all template. While such templates do indeed exist online, Maggio suggests that these may be good only to satisfy curiosity. They are definitely not an ideal tool for a business owner in dispute with his whole fortune up for grabs. There are just too many variables.
In putting a price tag on a business, the evaluator spirals in slowly. First she examines the particular industry and relates it to current economic conditions. The real estate brokerage cannot be priced at last year’s level today, for example.
This done, the valuator gets an overview of the books and records to decide on an approach. The three classical methods are the market approach, income approach, and asset approach. Each, as the name implies, launches investigation from that point, with ample overlap to be fully inclusive.
Finally, all books and records are scrutinized in detail within a flow of endless variables and adjustments. Capitalization rates, income streams, and asset valuations are all part of the picture. “There is a lot of art as well as science in this work,” Maggio admits.
In the end the evaluator submits a single figure backed up by somewhere between 30 to 300 pages of evidence. The very best thing the business owner can do during this process is to be totally cooperative and have his records well ordered. “If the owner is helpful, I can be in and out in a couple of days,” says Maggio. “But when owners oppose me, things get more expensive, and can drag on for months.”
Stay out of jail. “My major goal in every valuation is to get to substance,” say Maggio. By this she means ferreting out all of those little irregularities in the bookkeeping that may have lightened the tax burden in the past, but today give a skewed version of the company’s net worth.
One of her favorites was discovering a business owner’s personal apartment on St. Croix listed among the company expenses. Other irregularities may be as small as taking the family to a dinner weekly on the company tab, or listing junior’s car as a company asset, or paying junior a salary while he is away at college.
These little tax dodges are items that no one wants disclosed at a trial. Judges are officers of the court and thus bound to report to the IRS any potential tax fraud. “We are not out to nail anybody,” says Maggio, “we just want an honest price and a fair settlement.”
Thus when she discovers evidence of such evasions she contacts the business owner, who, after a brief explanation, is often eager to shift his dispute to arbitration. The judge is also pleased to hear that this case will be removed from his already crowded docket.
“But when I tell the judge and lawyers of the shift in venue, everybody knows what I am saying,” says. “Oh, and you’d better believe that the hidden St. Croix apartment got listed as a divisible asset in the settlement.”
Maggio finds that requests for her seminars are overwhelming. Evaluation has become one of the fastest growing fields in accounting. Because it is one of the most creative areas of the profession, young CPAs are increasing seeking out the specialty. And as current trends have proven, the market will be there to accommodate them.