A ROUNDTABLE DISCUSSION Advertising Section SPECIAL ADVERTISING SECTION BUSINESS VALUATIONS Determining A Company’s Worth During Divorce BRIAN BLITZ DEAN S. DUSSIAS JEFFERY M. LEVING ANITA VENTRELLI Principal Founding Partner President and Matrimonial Attorney Senior Partner Berger Schatz Dussias Skallas Wittenberg Law Offices of Jeffery M. Leving, Ltd. Schiller DuCanto & Fleck LLP bblitz@bergerschatz.com Koenigsberger LLP jleving@levinglaw.com aventrelli@sdflaw.com 312-782-3456 ddussias@dswklaw.com 312-296-3666 312-609-5509 312-967-7602 Matrimonial and Family Law Attorneys A successful company may be the most valuable asset of a business Lawyers. His honors include selection as one of Illinois’ Super Lawyers owner and his or her spouse. Its exact worth becomes a focus as (2008-2017), Leading Lawyers and Best Lawyers in America. In 2002, various life stages unfold—including divorce. he was selected by the Chicago Daily Law Bulletin as one of 40 Illinois Attorneys Under Forty to Watch. Crain’s Custom Media turned to four Chicago-based family lawyers to learn about business valuations as they pertain to divorce Jeffery M. Leving is president of the Law Offices of Jeffery M. Leving, proceedings, and what entrepreneurs and their spouses should know Ltd., a Chicago firm that concentrates on matrimonial and family about the process. law. He’s been named one of America’s Best Lawyers by Forbes Radio and is part of the peer-recommended Leading Lawyers Network. He Brian Blitz is a principal of Berger Schatz, one of the nation’s largest co-authored the Illinois Joint Custody Law, Illinois Virtual Visitation, law firms dedicated exclusively to matrimonial law, representing high- Right to DNA Testing Notice, and Unlawful Visitation or Parenting profile and high-net-worth clients and their spouses. He is a fellow of Time Interference Laws. In 2000, he helped reunite 6-year-old the American Academy of Matrimonial Lawyers and a member of the Elián González with his father in Cuba. He’s authored several books, Sports Law Association. Since 2013, he has been included in The Best including Fathers’ Rights, Divorce Wars and How to Be a Good Divorced Lawyers in America for the practice of family law, and is consistently Dad. In 2013, President Barack Obama awarded him the National named to the Illinois Super Lawyers list of Rising Stars and the Leading Lifetime Call to Service Award. The Illinois House of Representatives Lawyers Network. At age 33, he was selected by the Chicago Daily honored him in 2012 by adopting a resolution “for his work in Law Bulletin as one of 40 Illinois Attorneys Under Forty to Watch. safeguarding the rights of fathers and protecting the welfare of Committed to community service, he serves as a director of the Rolfe children and families in this State.” Foundation, a pancreatic cancer research organization, and supports organizations serving Chicago-area youth—recently as a coach and sponsor at NBA player Shawn Marion’s annual North Chicago Anita Ventrelli is a senior partner at Schiller DuCanto & Fleck LLP, a basketball camps. family law firm with offices in Chicago, Lake Forest and Wheaton. She represents professionals, athletes, executives, entrepreneurs and those Dean S. Dussias is a founding partner of Dussias Skallas Wittenberg who value their wealth, lifestyle and well-being. She prides herself on Koenigsberger LLP, an integrated family and business law practice with giving each client an honest assessment of how the process will work offices in Chicago, Deerfield, Oak Brook and Tinley Park. He’s practiced for him or her, and educating them on available options. Since 1997, family law for more than 25 years, representing entrepreneurs, she’s been a fellow of the American Academy of Matrimonial Lawyers. executives, professional athletes and other prominent clients in high- In 2003, the Chicago Daily Law Bulletin named her one of 40 Illinois profile and financially complicated cases. He helps clients negotiate Attorneys Under Forty to Watch. Since 2005, she’s been recognized when possible, but is prepared to litigate when necessary. Because his as an Illinois Super Lawyer; she’s also been included in the Leading goal is to solve disputes in a rational and cost-effective manner, he Lawyers Network and the Best Lawyers in America. She leads the faculty often recommends alternatives to costly court proceedings, such as of the American Bar Association/ National Institute of Trial Advocacy mediation and collaborative divorces. He’s a fellow and past president Family Law Trial Advocacy Institute, where she presents on business of the Illinois chapter of the American Academy of Matrimonial valuation and sits in the ABA House of Delegates.A ROUNDTABLE DISCUSSION ADVERTISING SUPSPPLEECIMALE ANDTV ETROTI SCINRGA SIENC’TSI OCNHICAGO BUSINESS SPECIAL ADVERTISING SECTION Advertising Section Jeffery Leving: A business valuation may How are intangible assets, such as customer SELECTING AN EXPERT CHALLENGING BUSINESS TYPES likely uncover hidden assets that otherwise lists and intellectual property, valued? would go undetected, financially crippling the uninformed spouse. Determining the true BB: We deal with intellectual property like value of a business is critical to safeguarding “Any business where earnings fluctuate or any other business asset. Trade secrets and “It’s critical that the valuation expert is well a client’s financial future. There’s no room for customer lists can be especially difficult to grow irregularly, or where there have been error here. value. Specifically, customer lists may only trained in the fields of business valuations extraordinary events in the recent past that be indicative of personal good will, which and forensic accounting, and that the expert What are some steps involved in a business Illinois courts don’t recognize as having value make predicting future cash flows more valuation? in divorce. For example, a commercial real has correctly conducted business valuations difficult, present greater challenges.” estate brokerage company may have a long in divorce cases.” BB: The first step is to determine if a business list of clients, but if the owner is the one may have value that would be relevant to a person primarily responsible for maintaining divorce proceeding. Is the business interest those relationships, then once the business JEFFERY M. LEVING, marital or non-marital? Does the business is “sold” (in the hypothetical sale that is have value beyond personal goodwill? ANITA VENTRELLI, used to determine fair market value), it is LAW OFFICES OF JEFFERY M. LEVING, LTD. SCHILLER DUCANTO & FLECK LLP Assuming it has, interviewing and selecting assumed that the owner will no longer be in an expert is the next important step. An the business—in which case the customer/ expert is well trained in the fields of business valuations and forensic What role does a business valuation play in a divorce proceeding? expert will generally then assist in the discovery process, as it relates client list may have little to no value. It will be part of the expert’s accounting, and that the expert has correctly conducted business to obtaining information and documents required to develop the task to determine to what extent customer lists or similar intangibles valuations in divorce cases. The expert should have significant Dean Dussias: It’s a vital piece of evidence that aids the presiding judge valuation. The expert may visit the business and interview other represent “assets” of the business with potential sale value, as opposed experience testifying in court in divorce cases, as he or she may be in dividing the marital value of the business, ultimately influencing the business owners and management; oftentimes the business’s CFO and/ to the personal talents, connections or expertise of the owner. aggressively cross-examined. final decision on how assets will be divided in the divorce. A thorough, or accountant are key players in providing critical insight and data. accurate valuation, calculated by a qualified business valuation expert, Lastly, the divorce attorney must track every step of the valuation DD: What valuation experts call “goodwill” we might call “the secret BB: It is critical for a business owner to let his or her divorce lawyer guides the divorce attorney’s work. Understanding the true value of the process, to make sure that the client’s interests are protected and that sauce.” Sometimes the owner of a business—and a magical combination guide the valuation process. While valuations may have already been business informs the legal strategy for most effectively preserving it. the ultimate valuation report accomplishes the client’s goals in of his or her contacts, knowledge and personality—is so essential to its performed internally for various reasons, such as to obtain financing the divorce. success that it’s difficult to imagine the business succeeding, or even Anita Ventrelli: It can also play a role in disputes over earnings and or to negotiate buy/sell agreements, valuations and valuation experts existing, without the owner. But it’s important to remember that the cash flows that relate to spousal maintenance and child support. used for other purposes, while instructive, are rarely suitable for JL: Other important steps include a forensic analysis of the income “secret sauce” is only one ingredient of the hamburger. Depending on Under the child support statute that became effective July 1, personal divorce purposes. I recently handled a case where an opposing expert stream of the business and the expenses that the business pays; and the type of business, its income sustainability—with or without the expenses paid through a business require adjustments to gross income. lacked experience valuing the kind of business my client owned, which understanding and applying the nuances in Illinois—for example: business owner—and other factors will determine if the goodwill is was a software company that also provided online services to its Brian Blitz: If one spouse owns and operates a business, either partially personal good will. An expert business evaluator who correctly takes clients. Our own expert, whom we selected based on his experience truly personal or whether it can be seen as “enterprise” goodwill; that or entirely, it’s more likely than not that the spouse will “buy out” the those steps will provide a keen insight into the issues, the business, and in divorce cases, as well as having performed several recent valuations is, belonging to the business itself versus the owner personally. If the other spouse‘s marital interest in the business. the industry, which the attorney can use in attacking and discrediting of similar companies, became the only expert the court relied upon, business really cannot survive and thrive without the business owner, the adverse party’s flawed business valuation. which worked out quite well for our client. How should a business owner go about selecting a Are certain types of businesses more challenging valuation expert? to value? DD: Typically, a family lawyer will have a working AV: Any business where earnings fluctuate or grow relationship with a few experts who might be irregularly, or where there have been extraordinary suitable for the business in question. For example, events in the recent past that make predicting some are excellent in examining and understanding future cash flows more difficult, present greater medical practices, but might not be as experienced challenges. Businesses structured differently than with manufacturing concerns. If the business owner those commonly found in a particular market also had previously worked with a business valuation make valuation more difficult. firm and was satisfied with their work, they can also consider them again. It’s good practice, however, to JL: Cash-based businesses are more challenging check with an attorney on this decision. to value; however, if you have a business valuation expert who’s a forensic accountant, the expert AV: The owner and counsel should meet the should know how to dig into the records to obtain valuator to decide whether they will be good at the true value of a cash-based business. Businesses explaining complicated concepts to the court in that have offices and do business internationally easy-to-understand language, and whether the require a special type of evaluation process and expert will be good at analyzing and helping figure resources. New, high-growth businesses require out the problems with the other side’s valuation. a specialized expert. With these businesses, the Looking at a prior report for writing style is a good expert must predict what the income stream will way to start. The best experts are unbiased, so an be when there’s not much of a track record to owner shouldn’t compromise quality by using the analyze. The expert will need to obtain a thorough company accountant or a relative, although those understanding of the industry and the owner’s true individuals can still be information sources for the expectations for the future. expert. Make sure there are no court opinions that SM criticize the expert, or any cases where a court “Dear Jeffery, JEFFERY L EVING decided that the expert wasn’t qualified to give BB: Sometimes it’s not the business itself but the I would like to congratulate you on the publication of Esq. your book, How to Be a Good Divorced Dad. an opinion. business owner that presents the greatest valuation I am honored that you chose to share it with me. The Law Offices of Jeffery M. Leving, Ltd. challenge. If an owner decides to be uncooperative Thank you for your commitment to ensuring that MATRIMONIAL TRIAL ATTORNEYS JL: I worked on a very complicated case utilizing in granting the valuation expert the data and access fathers play a role in their children’s lives. It is a cause that both you and I feel strongly about and I appreciate (312) 807-3990 | dadsrights.com Bruce L. Richman from Mazars as a business needed, this creates unnecessary obstacles that can your leadership”. evaluator and found him to be exceptionally bright, delay the final report, add extra costs and force the President Barack Obama Follow Our Victories skilled and ethical. It’s critical that the valuation lawyers to pursue litigation to get the valuation done.A ROUNDTABLE DISCUSSION ADVERTISING SUPSPPLEECIMALE ANDTV ETROTI SCINRGA SIENC’TSI OCNHICAGO BUSINESS SPECIAL ADVERTISING SECTION Advertising Section assets, such as the marital home, cash and distributions, courts consider income from DIVIDING THE VALUE EXAMINING A NON-MARITAL BUSINESS investment accounts. However, these matters all sources when awarding support. Finally, must be evaluated on a case-by-case basis. owners should not have people on the payroll I represented a business owner in a very who don’t work in the company; it makes it “One spouse can ‘buy out’ the other spouse’s difficult trial in which the court awarded my “If the parties can stipulate the value of easy for the other side to suggest the owner client the business and the home, and jailed is not honest. Bottom line, if an owner thinks marital share of the business—but unless the adverse party. The opposing counsel must the non-marital business, then a business about implementing a strategy that they the spouse has the cash or assets to finance have been very disappointed with the judge’s valuation may not be necessary; but in my would not employ for any reason apart from a decision. I was surprised she didn’t appeal the divorce, the owner should get counsel to the buy-out, this may require several years experience, both sides would be prudent to court’s decision. be sure it will achieve the goal, because to complete.” secure one.” changes before or during a divorce always DD: The homemakers’ contribution and its draw scrutiny. ascribed value can vary significantly on a case-by-case basis. For example, the spouse JL: If done correctly, a post-nuptial agreement who raised five children, attended every DEAN S. DUSSIAS, can be a valuable tool. A properly drafted BRIAN BLITZ, BERGER SCHATZ business dinner, and sacrificed his or her own DUSSIAS SKALLAS WITTENBERG KOENIGSBERGER LLP post-nuptial agreement should establish education and employment for the benefit that an existing or future business is non- of the business-owning spouse over 25 years marital; that compensation for the owner then typically that “personal goodwill” component of the company will may be judged to have made an equal contribution to the business and What advice do you have for a business owner contemplating divorce and management is reasonable; that there’s a plan of succession of be deemed to be personal, as opposed to belonging to the enterprise. its value. On the other hand, the “country club” spouse who outsourced who wants to protect his or her ownership interests? ownership in the event of divorce; that all appreciation is non-marital; The value of this goodwill will need to be valued and, in most cases, childrearing to three nannies and who rarely participated in work and the business’s value for purposes of divorce. Problems that can subtracted from the marital portion of the value. events might have a much smaller contribution attributed to his or DD: Once a divorce is filed, a court will have authority to preserve occur in the absence of a post-nuptial agreement include proving her efforts. the status quo and safeguard the marital estate. Transactions will the non-marital status of an existing or future business; how profits, AV: Intangible assets consisting of intellectual property use economic be scrutinized, and even conducting day-to-day business might be distributions and retained earnings are treated; and expansion of the analysis not unlike that applied to businesses themselves to assess AV: A business owner should not expect that a divorce will result difficult. Generally speaking, if a business owner is contemplating business and increase in value during the marriage. Finally, if a business earnings over time. Customer lists use methods that take the in owning and operating the business with a former spouse. Judges or is on the precipice of a divorce, it’s good practice to obtain and is non-marital, it should not be gifted to a spouse, as this could cause expectation of repeat patronage and the life of the list into account. In favor separation of spouses in businesses even when both are owners prepare an organized file with all business documents, records, returns, an owner to lose all or part of the business that might not have been other words, they can present the issue of a valuation within unless they demonstrate the ability and the willingness to continue in statements, ledgers, etc. for at least the past three years, since the otherwise lost. a valuation. business together after divorce. spouse’s attorney or other retained experts will be requesting them. The sooner this is done the better. It will reduce fees and costs and How should a business owner expect to divide the value of the business BB: Intelligent and creative solutions are paramount. For example, one minimize the delay associated with discovery, thus enabling the with a nonworking spouse in the event of a divorce? spouse can “buy out” the other spouse’s marital share of the business— business owner to return to normal operations more quickly. but unless the spouse has the cash or assets to finance the buy-out, JL: A common scenario is where the business owner is awarded the this may require several years to complete. The other spouse may also BB: A business owner contemplating divorce should be meticulous business, and the non-working spouse is awarded other marital demand sufficient security for the sale price, to about maintaining records showing when and how protect against death or default. In the end, these each business interest was acquired. Corporate transactions are really no different than other minutes, stock certificates, bank records, receipts, business sale contracts, in the sense that the two notes and gift tax returns may be essential Family lawyers who understand your business. spouses may agree to a wide array of financing in proving ownership and characterizing the possibilities. ownership as marital or non-marital. Also, if the Business lawyers who understand your family.™ owner has not observed corporate formalities, he or Is a valuation needed if a business is non-marital? she should start by maintaining separate business and personal accounts, formalizing corporate roles and duties, and recording and reporting JL: Absolutely. Illinois is an “equitable state,” where expenses. Finally, if a sale of the business is in the courts are required to divide the parties’ the foreseeable future and that owner/spouse is marital assets, as well as liabilities, equitably. The strongly considering divorce, the timing of the sale valuation of a non-marital business can be the key should be discussed with legal counsel. Finalizing in determining what is an equitable division of the divorce before the sale of the business could be the marital assets. Once a value is placed on the advantageous to a business owner. In the divorce, non-marital business, the value of that asset is the spouse’s minority interest may be steeply considered by the court in equitably dividing the discounted for lack of marketability and lack of marital assets. control, which could allow the business-owning spouse to buy out the other spouse’s share for far AV: While it might seem counterintuitive to value less than what the actual sales proceeds may bring. something that must be allocated to only one Here too, obtaining timely and smart legal advice person, courts must consider the value of one is key. person’s non-marital property in deciding how to allocate the marital property between the spouses. AV: Business owners who want to protect their ownership interests should protect their credibility. DD: What is “just” or “equitable” varies from case to If they inherit a business or receive it by gift during case. In a hypothetical scenario where the marital the marriage, they should not style the transaction estate consists of $1 million but one of the spouses as a purchase. Purchases during a marriage also owns a pre-marital business valued at $10 with marital funds are marital, which means million, the court could take that into consideration sharing value while businesses received by gift or and award the non-business owning spouse a inheritance during marriage can be protected as Dussias Skallas Wittenberg Koenigsberger LLP significantly larger amount of the marital property. non-marital. If an owner works in the business, the If the parties can stipulate the value of the non- owner should be paid a fair salary for the work done DSWKLAW.COM 312.226.8840 marital business, then a business valuation may because under-compensation can expose a non- not be necessary; but in my experience, both sides marital business to claims for reimbursement to the would be prudent to secure one. marriage. Whether the owner receives a salary or