How to Use a Business Valuation to Force Your Ex to Settle Faster

0:00Welcome to the bin there got out podcast I'm Lisa a state certified domestic violence advocate and veteran of more than eight years in the trenches of the legal system the last five successfully representing myself and I'm Chris I'm a certified high-conflict divorce coach and between the two of us we have all this knowledge and experience that we never wanted but now we can put it to great use providing expert guidance to people in high-conflict divorce and custody situations so you have the best chance in court and beyond having the right support from people who get it is so critical to getting you and your children through it as unscathed as possible and that's exactly what we do through our interviews with experts and other content right here on this podcast so let's get to it today's guest Sarah is a forensic accountant and

1:03she's got this unique talent in that she also does here she is all right so Sarah we're halfway there let me get you on here so let me invite the high conflict cases that we deal with our client has a business with their spouse everyone yeah so so I was so glad to meet you Sarah recently and find out that you have the skill that we rarely have talked about it's been years since we talked about businesses and how to deal with them in divorces because I've learned that when you own a business with your spouse it's almost like you have to get two different divorces right it's not definitely it's you know if you think about it there's partnership disputes and businesses all the time you don't have to be married to your partner but when you co-own a business with them you're having a partnership dispute and a marital dispute at the exact same time yeah yeah it makes so much sense so before we even dive into business

2:08valuations what they are and how they can be used in leverage Sarah why don't you officially introduce yourself yeah thank you so much for having me my name Sarah Naunchanon and I own the forensic accounting firm SN forensics we're based in New York City but we work remotely with clients all across the US and we work all different kinds of divorce cases as well as other areas of forensic accounting and more and more recently we're being brought in when businesses are involved because it's so complicated to understand what the income of each person is what to do with the business is there a value so I'm really excited to be here with all of you today to talk about business valuations and divorce yeah I know me too me too but like I said it's like a like a topic that we need more information on because we have so many in our community dealing with a very difficult ex and there's a business involved and I think one of the biggest issues that we see from the beginning is that our

3:09client doesn't have access to all the financials even if it's a 50-50 partnership how do you even start when it's supposed to be equal and one person doesn't have access to the record yeah so that's a great question and I do see it a lot oftentimes I'll see you know if it's a man and a woman who are married maybe the woman is listed as 51% so they can get you know minority status and certain advantages even though she you know isn't provided with that access to the business and so we see that quite often there's a couple of strategies I have the first is you know ideally you're working with your attorney you're going through the process and you're gonna request these documents that's the ideal scenario is you request them you get them yeah no it doesn't happen and so one of the things I always say is if you're going through a divorce or you're thinking about it keep an eye on the mail notice what financial institutions

4:12are sending documents to your house because you might need to subpoena them in the future and you can subpoena personal and business records so keep an eye did you get did the business get a letter from Chase to kind of figure out what accounts they have also tax returns you can request the tax transcripts and it's not always perfect but that's a great place to start with valuing the business is just getting those tax transcripts to understand what's their reported revenue what is their reported expenses and go from there so with tax transcripts I haven't even heard that term before I think of tax returns what's a tax transcript it's a way less intuitive tax return so basically if you get it from the IRS website they don't give you like the full tax return they'll give you even know how to explain it's like basically just like a typed out piece of paper where it says like total revenues this deductions are this so it

5:12like highlights the bigger picture but it's not broken up super intuitively so it's kind of tricky to read but it just gives you an idea of what's been filed without getting the actual return it's like an abridged version yeah it's like the cliff notes exactly it's like someone like a court reporter like transcribed what they saw on the tax return as opposed to being like here's how all the numbers are calculated it's just a bunch of lines with the information so it's like a surface level summary without the details but it still is a piece of evidence from the IRS it's not just like a self-serving exhibit where you said oh here's what I think it is it's nope this is what the IRS has even if you can't get the tax return yet it's significant correct and it does have the details it's just not obvious like you kind of have to go through it and figure out what it says but it will tell you total revenue total deductions if there's dividend income all of that will come

6:18up on a tax transcript it's just not broken out the same way and to my knowledge I've never seen someone like subpoena and get a full tax return like if you're getting this request from the IRS they only give transcripts okay so I always think about the cost benefit analysis like how much should I spend to get what hopefully will help me how much is getting a tax transcript and how long does it take on average so if that is a great question if it's a joint tax return or you have all the information you need which is part of it you can just go to their website and request it I don't believe it actually costs anything and you can get it from them I don't know how the process works if you have to like go more through the subpoena I'm assuming there is a subpoena costs attorneys fees but if if you have the information like the EIN number or the

7:19social security number of the individual you might be able to just get it from requesting through the IRS website all right that is so good to know because we always look for ways to do it ourselves if possible as cheaply as possible instead of having to go after the long arduous subpoena and then things don't turn up and I also love the idea about checking the mail even for the institution so if you don't know an account number and often there's many accounts and various hidden places but just to know where to start with where something might be right and so you send the or your attorney or whoever sends the subpoena to the institution and you say give me all records for ex person's name and ex business and you know you attach whatever you need to attach to show that it's part of a divorce proceeding and then you get a piece of information it might not be all the information you need but someone like me can then look at the bank account

8:20okay now that we have this from cheese we see transfers to Wells Fargo so now we're going to go to Wells Fargo next and we're just going to start piecing the puzzle together yeah so you're like a detective yes all right so how do you start putting together well let's talk about what is a business valuation and how does that connect to getting a tax transcript or tax return or whatever like how does that connect to the bigger picture yeah so a business valuation is trying to figure out depending on your state either the fair market value or the fair value of the business so if anyone was operating this business and you wanted to buy it on the open market what value would we assign to it and so that's important for a couple of different reasons one if your co-owners or even if you're not co-owners but you live in a state where the business is considered marital property there's a potential for that to be divided as an asset in your divorce and for you to

9:22get a percentage of it so you want an accurate valuation to know you know if your 50-50 owners one of you is going to walk away just like with any partnership dispute the remaining partner has to buy you out for your half and what is that half equal to so you need the business valuation to understand that component also in the process of the business valuation we can identify income available for support because you know as a forensic accountant I see a lot of creative accounting out there I see a lot of small business owners who want to minimize their tax impact so they deduct a lot of personal expenses through the business to pay minimal taxes but then when it comes to income available for support well you didn't really make $20,000 a year your kids are going to private school you're driving a Lexus you live in the most expensive town in the biggest house what was your actual earnings so then we have to look at all of those personal

10:27deductions and back that out to figure out what they actually made as business owners hmm yeah I mean we learned this term from a New York City attorney his name is Joni Leveracy said there's something called IPS instant poverty syndrome that happens to a lot of people right around the time or a year before it's it's time to get divorced and so suddenly oh I had a terrible year or I lost my job or whatever the case is that the money has changed and now I have nothing or it's far less than the past right and I actually had a case I ended up going to court on it and it was interesting so you know when an expert goes to court the other side hire is an expert and so as part of the business valuation I won't get too technical but you basically assume a reasonable salary for the business owner I think we had assumed like $50,000 based off of the information we had and the other expert like attacked me was like

11:28no one can live on $50,000 in that county like he could go work you know at a fast food establishment and make more money so when he was cross examined our attorney took the tax returns and was like well this year it said he made 20,000 and last year it said he made 50,000 so is it your professional opinion that nobody could live off of this the way that he's living and this be his true income and so you know that's why you have to be really careful I mean one should never lie on your taxes just friendly CPA advice out there but number two it's all traceable there are ways for us to come to the right conclusion and I think at the end of the day you know that person was reporting 20,000 and maybe they were making a hundred thousand it's not a huge leap but when it comes to spousal support and child support it does make a big difference right and also it affects your credibility right which is everything with court stuff because if you're already if you

12:31start off lying and people could poke holes in your financials then you know you're you're going to be in a bad a worse place with the judge absolutely and I don't know if this is true in every state but in New York and New Jersey where I'm often working matrimonial judges are mandatory reporters so if it comes out in court that you are committing tax fraud that can get reported to the IRS so just notes out there of you know I know all of your friends do it it's a way to you know keep money in your pocket when you have a business but especially in divorce proceedings that business is going to be analyzed with a fine tooth comb and you really want to make sure that everything is reported accurately yeah that's interesting um I don't think that every state has mandatory reports I think we get excited I know I had gotten excited when I discovered some creative accounting on my ex's own tax returns um and I assumed this would be so significant

13:34that the court would report it to the IRS and they didn't and they don't in most of the places that we I mean we have clients all over the world and in most states the judges don't report it and I think I was also told by an attorney you know you want to be careful because if you focus on tax fraud and let's say the person ends up in jail that's going to affect your support so do you really want to go down that route of having them being prosecuted if it's been I mean isn't your goal to get out of here and have yourself and your kids support it and that's a great point and also if you're a co-owner of the business and you're not in tune with the financials you're personally liable as well if it's the joint business and you're signing the tax returns so just a friendly PSA out there to everyone to please report everything accurately on your business returns thank you yeah so okay so now let's start talking about business valuations as leverage because we always want to keep things out of court if possible how can we use business

14:37valuations to pressure someone to settle and get this done faster and easier and cheaper yeah so it's a great question and you know first it it always depends on the facts of the case I work a lot outside of the court system where we're trying to get a value and as long as we can get in the ballpark we can have those conversations we can come to an agreement but a lot of times what happens is people say my business has no value it's just me it's all good will or you know those types of arguments and just letting them know that you know I'm sorry but that's not how the court's going to see it and if you have to go to court on a business valuation I think part of the leverage comes from the cost as well because what you can do outside of court we offer cost-effective solutions that get within the range of the value but if you go to court you each are spending $60,000 on an expert to write a report to testify to the action of the whole expense

15:45of going to court. Exactly so if you're thinking about it if your business is only worth maybe a hundred thousand dollars you think it's worth zero well let's do a valuation and try to come somewhere in the middle or you're going to spend more than the value of your business in court to have it valued and then have to pay out the additional value of the business on top of the legal fees and the expert fees so really it's about you know staying out of court getting the right answer and is being truthful with yourself like you know the best question that we ask when there's an expert who says a business is worth nothing or an individual is then why do you do it if your business is worth nothing and you make no money why aren't you an employee somewhere why aren't you getting benefits it's it's hard for me to imagine how people think they can still get away with saying no there's no value take me to court yeah what about something like a service

16:48business where there's like I think about what Chris and I do like there's not stuff yeah and that's a great question and um within the business valuation again without getting too technical we consider the company's specific risk so we would say okay um trying to think you know unfortunately I think divorce is kind of a stable industry um there's always going to be something out there but if you look at like restaurants and what happened with COVID there's some degree of risk that you have to add in because the company you know could be affected and stop operating but then there's also um certain states allow discounts so not every state does it and it's called a discount for lack of marketability and so that's saying you know like your firm or even like my firm someone could buy it but a lot is based on my brand and my reputation like can I really market this with someone else at the helm right right and then that that discount

17:51would reduce the value but it doesn't bring it to zero that's really interesting hmm well good to know all right so any other things that people should be aware of when they are sharing a business with their I almost said ex with the spouse and they're on the verge of divorce yeah so I actually had a consult yesterday and it was very interesting because we talked about the free labor that a spouse provides in the business and how the court doesn't always accept that as a contribution to the business a guy even think about it last night you know my husband and I are stuffing envelopes to send brochures to attorneys and no I don't pay him and he's not listed as an owner of the business and so I really think people need to think about one how as a spouse your labor does not have to be free and that you could gain a percentage of the business if you're actively involved in it because your legal system might not agree with your active involvement

18:55so to make sure that you have contracts or records that say hey you've been helping me a lot I'm going to give you 20% of this business while you're still married so that you have something to hold on to in your divorce because I think a lot of times you get that you know free labor from the spouse and then the court school the businesses isn't married all and they got nothing they weren't paid hourly they didn't get paid out of the business they have nothing to show for it it's so funny Sarah because you just mentioned how your husband doesn't have any doesn't have any percentage of your businesses but I know I know the pot calling the kennel black out here but it's um it is something that I think about and I even you know my husband and I we've been married for two years so we're still in the newlywed phase no one wants to think about divorce and I and I say things to him like you know we get a check from his father and I'm like do you do you want your father to write a gift letter and like say this is a hundred percent

19:56separate property and he's like what are you talking about and I'm like does they just see these things come up yeah but you don't think about it until you're on the other side yeah yeah so so he's good to just have your what's about you just in case hopefully not but but really good to know all right so Sarah how can people find you and I'm and before I forget when we first talked you mentioned and you mentioned it here that there's other things you can do that are not as expensive as let's say some full business evaluation I can't remember the name of it yes so the technical term in the accounting world is the back of the envelope calculation which comes from like sitting in a conference room doodling on the back of an envelope so we can do that to just kind of give you an approximate value our most popular service is called an indication of value it's a little bit more inclusive but it still is just our calculations and a brief letter it gives a range of value for the business and that's what we use most often in mediation

21:01if we're court-appointed neutrals to really keep costs down but make sure we're we're close to the right answer and then what you see when you go to a trial or in court is called a calculation of value or a conclusion of value and that's your 60 page report that talks about economic conditions costs you know probably more than you make in a year more than anyone makes in a year oh my gosh all right so how can people find you so I do have an Instagram here it's brand new you guys can message me but my website is snfriendsix.com there's a contact page definitely feel free to reach out we have consultations we'll talk to you about your case and we'll also talk about does the business valuation make sense for you because it doesn't make sense in every case and we want to make sure we're not charging you for something that you don't need and wouldn't benefit you yeah well thank you so much Sarah for taking the time especially I know during this busy season and this

22:04is so so helpful so I'm really thrilled that now I have another resource to share with our clients and communities about businesses and how to handle it and what to think about and little thing is that they can do themselves especially to save money in getting this done because it is very very overwhelming absolutely well thank you so much for having me and I look forward to talking with anyone who has questions about this yes and really appreciate your your allowing that for them all right let's hand touch thank you okay bye bye thanks for listening to this episode of the bin there got out podcast please leave us a review on whatever platform you're listening on and you can find us easily on all major social media but especially Instagram and YouTube if you think we might be able to help you with your own situation just visit bin there got out calm and click the button to schedule a complimentary discovery call thanks again and see you next time