Family Businesses in Divorce Cases Can Present Difficult Valuation Issues

Family businesses can present unique challenges for both Equitable Distribution and matters of Support, Alimony Pendente Lite and Alimony in Pennsylvania divorce cases. For this reason, it may be necessary to obtain an appraisal of the value of the business or the income that the business produces. This appraisal is commonly referred to as a Business Valuation.

To properly evaluate a family business, the valuator will want to review all relevant financial records for the business, including tax returns, profit and loss statements, income statements and balance sheets for multiple years.

Because not all businesses are the same (even within the same industry), the business valuator may consider “normalizing adjustments.” Normalizing adjustments are an effort to make an apples to apples comparison of the business in question to similar other businesses.

There are typically two types of normalizing adjustments: Type 1 Normalizing Adjustments remove one-time, non-recurring or anomalous items. Examples of Type 1 Normalizing Adjustments may include litigation settlements, asset acquisitions and increases in costs of goods sold or inventory. Type 2 Normalizing Adjustments normalize owner and/or officer compensation of a kind that wouldn’t exist in a well run, public company. Examples of Type 2 Normalizing Adjustments include adjustments to owner/officer compensation, travel and entertainment expenses, rent, professional fees, family member and/or related party transactions.

Because of the time and expense involved, business valuations are not conducted in every case and the decision whether a complete valuation is required should be discussed with your divorce mediator.

For more information on this topic or any other topic related to issues of divorce, custody, support or family law in general, please contact Tim Colgan or call (800) 615-0115.

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