Business Valuations and Income Determinations in the Professional Practice

In a recent blog post we discussed the importance of prenuptial agreements for the small business owner, and mentioned the particular significance for those whose businesses derive their worth from their book of business, or the “goodwill” aspect of the business.  We often see these types of businesses for those in the associated medical and accounting professions.  Quite frequently, doctors, dentists, accountants, and lawyers operate a Professional Practice through their own corporations hold few physical assets, but may have significant value as a result of their clientele.  As these types of businesses develop their value more from their reputation and clientele list, they are difficult to assign an actual dollar value to when trying to divide their worth during the breakdown of relationship.  It is for this reason that prenuptial agreements are essential for those whose livelihoods depend on businesses of these sorts – a prenuptial agreement allows those individuals to pre-decide how their businesses will be valued and divided, if at all.

However, what about those individuals with businesses of this sort, who are divorcing without a prenuptial agreement?  If the business in question can be considered matrimonial property, it may be near impossible to assign a value to the business for the purposes of dividing that amount in the overall division of matrimonial property, without retaining accountants trained in business valuations to provide an opinion.  While the costs associated with retaining a Chartered Business Valuator to prepare a valuation report of a business may seem high, it is often the case that without such a valuation, the parties to a divorce are left guessing as to what might be the right value for the company.  Without the assistance of a Business Valuator, it can be quite possible for parties to either undervalue or overvalue a business to the extent that one of the parties might lose more money than the cost of the report.

Additionally, beyond issues of valuation, those individuals who receive their income through their own corporation, also face potential concerns in relation to determining their income for the purposes of child and/or spousal support.  As those who pay themselves through their own corporation have the ability to determine their own income, and also have the discretion to write off a number of expenses that might blur the line between business and personal expenses, it is not always the case that the Total Income listed at Line 150 of that person’s tax return is an accurate reflection of all the money that is available to that person for the purposes of support.

As a result, there are many cases where parties cannot agree what the actual income of an individual is for the purposes of paying child or spousal support.  Similar to trying to assign a value to the business that that person derives their income from, guessing at an income can often result in a party overpaying support, or alternatively, the other party not receiving enough support.

As a result, most Chartered Business Valuators are also trained in performing income determinations of those who receive an income through their own business, and the two calculations can often be undertaken at the same time.

While it may result in additional costs as a result of retaining a third party to prepare these reports, in the absence of a pre-nuptial agreement, the assistance of a Chartered Business Valuator is instrumental when parties need to value a business or properly determine an income, so as not to make guesses that might be prejudicial to their own interests.

The lawyers are Mincher Koeman Family Law Chambers work closely with a number of experts in business valuation and income determinations.  If you need help with a complicated issue involving your business and the breakdown of a relationship, or require assistance in determining your or your partner’s income, we have the experience to help you.  Contact us at 403 910 3000 or reception@mincherkoeman.com.