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Articles From Brisbane Consulting Group

Timing and Financial Expertise are Critical in Divorces Today

As the strictest measures against the COVID-19 pandemic subside, clients may be eager to cut ties with a spouse — the sooner, the better, especially for more complicated marital estates. How can you expedite the divorce process?

Bracing for a Possible Surge

Many people expect an uptick in divorce filings in the near future. One reason is pent-up demand for divorces: The pandemic forced many couples who were contemplating a divorce to postpone their filings for practical reasons. These may include restrictions on court proceedings, child-care issues, health concerns, layoffs and financial uncertainty.

Another reason is that lockdowns may have resulted in too much “together time.” Without the distractions of normal day-to-day activities, some couples realized that they don’t share the same fundamental beliefs on parenting, finances and health-related matters. Living 24/7 in close quarters also has made it harder for spouses to hide mental health issues, extramarital affairs, and gambling or drug addictions.

Financial difficulties were especially pronounced for small businesses that were adversely affected by the pandemic. Examples may include restaurants, gyms, salons, recreational facilities and dry cleaners. Some were forced to close due to loss of a key person from COVID-19 or loss of revenue caused by government-mandated closures and operating restrictions. The stress may have driven many of these business owners to divorce.

Timing the Filing

A fast resolution may be desirable for many reasons. Some couples feel they’ve been stuck in a holding pattern and want a quick, fresh start. For others, timing can impact the effective valuation date of marital assets.

For example, a business owner who’s filed for divorce may not want to share with her spouse any post-pandemic sweat equity that she’s investing in rebuilding her business. Alternatively, someone who’s married to the owner of a struggling business might want a piece of the current value of her spouse’s business interest — before additional market changes further erode the business’s value.

Timing can also affect awards of spousal and child support payments. A recipient of these payments might want a quick resolution if his or her spouse works for a struggling company that’s contemplating layoffs, which could result in lower earnings. Conversely, a payor of support payments might want a quick resolution to minimize the monthly payout if he or she expects to earn more in the future.

Expediting Discovery

Working with an outside financial expert early on can make the settlement process more efficient. During discovery, the expert can provide a comprehensive list of documents and procedures needed to complete the job. This can improve the timeliness and scope of discovery.

If discovery is incomplete, the opposing spouse may be concealing assets or income. In this situation, the scope of an assignment may need to be expanded to investigate financial misstatement and asset misappropriation. It’s better to know about missing or inaccurate financial evidence sooner rather than later.

Additionally, for marital estates that include a private business interest, early involvement of an expert provides adequate time to perform a comprehensive valuation and allocate goodwill, if applicable. A valuation takes time to complete, and courts may be critical of experts who perform rushed analyses.

Encouraging Settlement  

Out-of-court settlements are generally preferred to court-imposed settlements. First, judges may differ in their interpretations of legal precedent. In addition, they might arbitrarily allocate marital assets to the parties, regardless of the spouses’ personal preferences or the tax consequences.

During settlement negotiations, financial experts can explain complex financial issues, provide summaries of personal income and marital asset values, and evaluate the tax implications of settlement options. They also can help diffuse emotions and focus discussions on valuation and tax matters. Specifically, an expert can pinpoint missing financial information and key valuation discrepancies.

Sidebar: King v. King: Goodwill Analysis Gone Bad

In a recent divorce case, a Florida appellate court reversed the trial court’s valuation of the couple’s insurance agency. A key issue on appeal was the value of the husband’s personal goodwill. Under Florida law, personal goodwill isn’t a marital asset and should be excluded from the value of the business for equitable distribution purposes.

The husband’s expert estimated his personal goodwill at 68% of the agency’s value. That estimate was based on the income he produced and the business he could take with him if the company were sold without a noncompete agreement.

The wife’s expert estimated the husband’s personal goodwill at 7.3% of the agency’s value. That estimate was the average amount allocated to noncompete agreements in 28 insurance company transactions from the DealStats database.

The trial court adopted the conclusion set forth by the wife’s expert. But the appellate court rejected that conclusion because the expert failed to analyze or disclose the details of the comparable transactions. The court also criticized the use of some transactions that took place outside Florida, as well as some that were almost 20 years old.

When relying on comparable transactions, experts should delve into the details of the guideline companies. You can help, too, by giving your expert enough time and information to perform a comprehensive analysis.

Experts are Valuable Assets in Divorce

Financial experts can help settle complex estates. But they also recognize that settlement isn’t always feasible — and are ready to customize their procedures to handle unexpected developments throughout the divorce process.

Timing and Financial Expertise are Critical in Divorces Today

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Doug is a Partner with Brisbane Consulting Group, LLC providing business valuation, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. Doug has experience consulting with publicly traded entities and valuing a variety of closely held companies in connection with mergers, acquisition and divestitures, business combinations, estate and gift tax planning, ESOPs, and purchase allocations.

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