Divorce Settlement with Business Asset

Client

John – 55 Years, Business Owner, Amicable Divorce

Like most business owners, John did not have many financial assets like a 401(k) or individual stocks & bonds; he had a small IRA that has around $300,000 in it. Most of his net worth came from the operation of the business he’s built and run for the last 30 years. He wanted to keep operating the business but planned to offer his wife payment equal to half the value of the business as part of the asset division proposal. John was also looking to step away from some of the day-to-day activities as a business owner.

John founded and built his business from the ground up over a long career in the construction industry. He runs two locations across the state and has 15 full-time employees.

Small Business with 2 locations, 15 employees
$300,000 IRA

Challenge

John needed to submit a valuation for the business with his financial disclosures. John wanted to keep operating the business, so he needed to generate funds to buy his wife’s share in the business. John was also looking to step away from some of the day-to-day activities as a business owner.

His presence and management are key to the operation of the business. John wanted to be able to keep the business open and running after his divorce but didn’t have the cash to be able to pay out his wife. John was not well versed in finance; he knew he could provide a comfortable living for his family but didn’t know how to value his business.

Arrive at a fair and equitable value for the business required for the mandatory financial disclosures phase.
Retain business (operating and cash flow income).
Reduce his daily task workload as the business owner.

Industry Pitfalls

John struggled to get expert advice.

Industry valuation norms suggested his business was worth between $15M – $20M, but that method would not work when trying to arrive at a value to payout his wife.

John spoke with his CPA, who was an expert on tax advice but did not have knowledge about the current state of the M&A market and couldn’t put a value on the business.

His divorce attorney was not familiar with how to value an ongoing business either and suggested John speak with some investment bankers and M&A brokers. John met with some local and regional M&A brokers and provided a breakdown of the business:

Minimal liquid assets
Substantial investments in machinery and inventory
Zero debt
Generates positive cash flow

The M&A brokers and investment bankers were knowledgeable about his business and industry, but all of them recommended selling the business, which is not what John wanted. Investment bankers and M&A brokers are incentivized to recommend selling the business because they would earn a “success fee” as part of the transaction.

John then spoke with several financial advisors, but these individuals mostly offered financial planning services and did not have the expertise John needed to put a value on his business.

The financial advisors were unable to offer holistic financial advice; they didn’t understand his business or have any kind of familiarity with the construction industry.

Even though he was working with Certified Financial Planners, John came to the realization that those advisors did not have the ability to service business owners like him. They reviewed John’s financial situation and recommended selling the business and investing the money in some of their retirement solutions. Those advisors couldn’t incorporate a large illiquid cash-generating asset like his business in their financial planning software, so they recommended John sell his business and invest in things the advisor would manage and earn a fee on.

Solution

Vail Valley Asset Management reviewed a draft of the proposed division of assets and pointed out that John would incur a substantial tax bill if they followed the draft plan. Unlike investment bankers and M&A brokers who are incentivized by “success fees,” Vail Valley employs Chartered Financial Analysts, who have spent years honing their skills specifically on how to value and manage assets. Vail Valley Asset Management spent time to deeply understand the operations of John’s business, the competitive environment, industry outlook, and the current M&A environment and provided a framework for both John and his wife to view the valuation of the business from a variety of perspectives. Vail Valley understood the sound long-term economic position of the business in its industry and recognized the attractive return on invested capital and recommended that John maintain as much economic interest in the enterprise as possible.

Vail Valley worked collaboratively with John to establish a reasonable valuation range for the business and served as a sounding board to evaluate possible liquidity events; these would allow John to remain involved in the business, monetize a portion of the business to pay out his wife, and continue to have an economic interest in the business over the long term. Vail Valley provided this objective advice for no additional cost outside of the modest AUM-based advisor fee they charged for managing the small IRA John had. Vail Valley Asset Management worked to create an alignment of interests and focused on building a long-term relationship with John, while serving as a source of trusted, objective advice.

Ultimately, after evaluation of:

A complete sale;
A leveraged recapitalization;
A sale of business assets;
A sale to competitor;
And negotiating a complete deferral of payment to John’s wife,

Results

A reasonable valuation was established, which informed the approach to the divorce settlement agreement. John retained his business and met all of his goals.

Vail Valley Asset Management helped John find a strategic business partner for his business. Through a minority recapitalization, John was able to monetize a portion of his business that satisfied the payout to his wife; he also was able to maintain economic upside in the business as it continued to grow and achieved his goal of off-loading some day-to-day responsibility to the new strategic partner. Vail Valley Asset Management coordinated with the business owner’s tax accountant and business attorney to optimize the transaction terms and served as a trusted advisor when interacting with the investment bankers and M&A brokers who are incentivized by success fees.

Divorce Settlementwith Business Asset