Mary, if it ever comes down to this you can have it all,” I told my wife during a late night phone call. The call was made from halfway across the country where I was consulting with an old friend and fellow printer. Actually, it wasn’t a consulting visit, but rather three grueling days spent onsite as both an observer and an expert witness in what could only be described as a nasty divorce case.
Now, while I don’t know much about divorce, and I hope that I never do, I do know something about printing and I am considered an expert in valuing printing firms. It was in this context that I found myself involved as an expert witness in a divorce proceeding. The client was a long-time friend and, against my better judgment, I agreed to appear on his behalf.
The legal proceedings lasted three days. I was there for two of those days – the first day as an observer – and on the second day I appeared as an expert witness for about two hours. In addition to the two days spent in court, I spent the day prior at my client’s office going over testimony and explaining various valuation methods to the attorney.
I don’t know why, but I had initially expected a fairly small proceeding. Wow, was I nave! Gathered in the conference room during most of those three days were three lawyers, four CPAs, three property appraisers, and three business valuation experts. In total, 14 experts were scheduled to testify in the case.
The one overwhelming fact that stuck with me was the only folks who were going to be winners in these proceedings were the lawyers. With both sides armed with six-inch binders crammed with legal exhibits and depositions, it was apparent that the combined legal and expert witness fees would easily top $100,000 and that probably didn’t count all of the expenses.
The lessons to be learned from this appearance? Most of the financial expenses could have been avoided had the couple, early in their business life, conferred with an accountant or CPA and stipulated a method to be used, then and in the future, to value the business. Such planning should be done in the context of estate planning; something everyone should be doing on a regular basis.
Most couples have an opportunity to spend a few thousand dollars now, or possibly face the prospect of spending $100,000 or more in a trial like the one described above. Unfortunately, very few couples (and that includes general partnerships as well) do this kind of planning, and that is truly unfortunate.
Ironically, I estimated that the total amount of expenses incurred on both sides in this divorce proceeding exceeded the estimated differences in business value placed on the business by each party. Had the parties initially agreed to simply split the difference in estimated business values they could have saved themselves between $50,000 and $75,000 in legal fees – and that is a conservative estimate.
Economic vs. Business Value
During the legal proceedings, the phrase “economic value” was mentioned by one of the witnesses. While I understood completely the context in which it was being used, I don’t think I have ever heard it mentioned in terms of business valuations. Nonetheless, it made perfectly good sense to me.
A business really can be seen to have two values – one is the value that the business has as an ongoing entity to the owners or partners and the second is the value of the business if it is sold to a third party.
Oftentimes, early on in the valuation process, couples are shocked to learn that they cannot combine the total amount of compensation paid to both of them and then use this amount in a formula to determine the value of the business. While Bob and Kathy may each take out $50,000 in salary and another $6,500 each in personal benefits, the total amount of compensation of $113,000 will not be used to establish the fair market selling price of the business.