But What About the Business? M&a Advice for Family Law Attorneys

• Jurisdiction: California,United States
• Author: Kenneth Luer
• Publication year: 2015
• Citation: Vol. 37 No. 4

But What About the Business? M&A Advice for Family Law Attorneys

Kenneth Luer

Ken Luer is a partner in the Business and Corporate Law Group of Ervin Cohen & Jessup LLP. Ken has over 30 years of experience serving entrepreneurs and family-owned businesses in forming, restructuring, financing and selling their companies, and handling a full range of their business transactions, contracts and strategic commercial relationships. Ken has a particular specialty in advising family law attorneys on how to monetize a spouse's interest in a valuable closely-held company as part of a marital property division, and frequently speaks and writes on this subject.

For many married couples in California, a closely held business is their most valuable community asset. They may be co-owners of the company, or one spouse may be the record owner with the other having a community property interest. In either case, whether or not both spouses have been active in the business, it is likely that only one spouse (the "Remaining Spouse") will remain with the business following their divorce.

So, in addition to the many highly charged family law issues such as child custody, support, and division of personal items, there arises this critical problem: How can the "Departing Spouse's" interest in the business, after its value has been determined, be turned into cash? The answer is further complicated by this reality: The business is not just an asset to be divided, it is also the principal income source for the Remaining Spouse and for spousal and/or child support payments to the Departing Spouse.

Consider this example: A couple has been married for twelve years and they have two children, ages eight and six. The husband started a software development company ten years ago and is the President and sole shareholder. The wife moved to a flexible part-time status at her job several years ago, since she's the primary caregiver to their children. The kids are in private school, there's a daytime housekeeper, and, between the mortgage and equity line, there's relatively little equity in their home. The business, while not a "tech high flyer", has grown steadily over the years, and is likely valued at between $15 and $20 million. In this example, how can the wife's 50% "paper interest" be turned into $7.5 to $10 million of cash?

From a business lawyer's perspective, there are three principal alternatives:

• Installment Buyout. The Remaining Spouse offers a relatively modest down payment for the Departing Spouse's interest, with the balance to be paid in installments over five to ten years.
• Third Party Financing. The Remaining Spouse obtains third-party debt or equity financing to make a lump sum payment to the Departing Spouse or, at least, a much larger down payment with a far shorter/smaller installment period.
• Sale to a Third Party. The business is sold to a strategic or financial buyer, with the net sales proceeds split between both spouses.

Each choice, of course, has some clear pros and cons, some applying equally to both parties and some favoring one to the detriment of the other. This article will summarize these choices and the steps a transactional attorney will go through in advising the Family Law specialist, and her or his client, in negotiating a realistic and fair resolution to this common situation.

Valuing the Business

The first critical issue will be how to determine the value of the business. This should be done by an appropriate professional using stipulated criteria relevant to the particular business. For certain businesses, this can be most efficiently done by a forensic CPA. For others, an independent valuation firm may be needed to analyze the business and find selling values of comparable companies. These professionals will work with business counsel and the client to define the scope and relevant factors of their analysis. CPAs generally will charge at their hourly professional rates while valuation firms often charge a fixed fee for the work performed.

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Other situations may require more than a valuation to discover the full value of the business. For example, if there likely will be a third party financing or a sale of the business, engaging a business broker or investment banker to evaluate the company and its industry can lead to this measure of fair market value: Who are the potential buyers of that business and what are they likely to pay for it? These professionals typically will charge a retainer and/or monthly fee to be credited against a success fee paid from the closing proceeds as a percentage of the total transaction value. The fee will be significantly higher than for a stand-alone valuation, but the services of a business broker or an investment banker may bring a significantly higher financing or buyout amount.

Installment Buyout

Often, the "Remaining Spouse" proposes a...