High-Net Worth (High-Asset) Divorce

Business Valuation/Division

The valuation of a business or professional practice in a divorce proceeding requires the resolution of complex issues. The focus being the valuation date and the standard of value to be applied. In Arizona, Judges have the discretion to decide these issues by considering specific factors that are specific to your case. 

Arizona Family Law Courts are courts of equity; meaning, in a Divorce, they strive to divide assets fairly. Meister v. Meister, an Arizona Court of Appeals case, provides Trial Courts discretion to determine what the value of a business is and on what date they use for the valuation. The Court’s date of value must comport with principles of fairness and equity. 

If the parties and their Business Valuation Experts do not agree on a specific valuation date, it is common for the experts to provide alternative valuations using different dates for valuing the interest at issue.

Additionally, the Court must choose a standard of value (i.e., the method for determining the business value). There are three methods, Income, Asset, and Market.

• • Income/Capitalization of Earning Approach: To value a business by its income, a valuation professional looks at historical income and current income, as well as risk and other business-related benefits. They then calculate the business owner’s income in the future based on the expected rate of return (as drawn from historical patterns) or by using other forecasting information.

• (1) The most common adopted by Experts. 

• (2) Taking revenue of company, subtracting liabilities, adjusting revenue for risk factors, expenses, and then expert creates a cap discount rate. Applies it to the net, divides by the cap rate, and then comes with a valuation amount.
• (3) Discounts the future value of rents by capitalization rate = real property. 
• • Asset/Book/Cost Approach – 6 Factors. The Asset Approach considers and values tangible assets (i.e., anything physical, like inventory or a building) and intangible assets (i.e., assets such as patents and goodwill). Liabilities are then subtracted from the total assets to determine the net value.

• (1) The value of the hard assets you have on the books. 

• (2) Lowest value a business can be worth. 

• (3) Doesn’t capture GW. 

• (4) Cost of reproduction approach: what an insurance company would pay to replace. 

• (5) Every business is worth at least this value. 
• (6) Min worth of business. 
• • Market Value Approach – 5 Factors: A Market Approach aims to determine how much the business owner would get if they sold their business. In this approach, the valuation professional makes comparisons to other similar companies that have been sold.

• (1) Business is compared to other businesses that are in a similar situation. 

• (2) Captures GW.

• (3) Based on principle of substitution = willing buyer’s purchase price.

• (4) Sales comparison approach = comparable business sold in marketplace.
• (5) Probably the best indicator of value. 

Executive Compensation

Salary and compensation can be a complex area to navigate, particularly in Divorces that involve one or more spouse’s executive perks and compensation beyond their typical base salary. If you or your spouse are an executive or in management at a company, it will be critical to have an understanding of the relationship between Divorce and Executive Compensation Plans.

Executive Compensation beyond salary typically comes in a few forms, including:

• An Employee Stock Option is a benefit offered by employers that allow the employee to purchase shares of company stock, at a discounted rate, usually after a certain time period has occurred, ie., “vesting.”  Employee stock options allow the employee to buy company stock at some regular frequency, usually at a price that is discounted from the current market price. Purchased shares can be sold immediately, or they can be held for at least a year for more favorable tax treatment.

• Restricted Stock Units Restricted Stock Units (“RSUs”)

RSUs are Restricted Stock Units. They have become a popular retention tool for big companies. RSUs aim to provide stability and incentivize the employee to remain with the company long enough for the shares to “vest.” Vesting refers to the timeline in which you gain ownership of the stock shares. This adds a layer of complexity to Divorce divisions because often, RSUs don’t reach their full vested value for years. Generally, with each year that passes, the employee owns more and more of the RSUs until they are fully vested, with 100% ownership and it cannot be taken back by the company.

RSUs are basically a promise to issue shares of the employer’s stock when specific time conditions have been met.

Here are some important points about RSUs that are relevant to divorcing couples:

• RSUs are not like stocks in that they retain some value even if share prices for the company drop. The only exception is if the stock price goes to zero.
• RSUs are dependent on the company’s stock value and so the precise future value can be hard to determine before vesting.
• RSUs generally require you to remain with the company until they vest. They would, in almost all cases, be forfeited if you left before that.

As part of the financial disclosure process, employees need to disclose any RSU grants. That is where the simple part of this ends. From there we need to determine if it is Community Property to be divided. That question depends on your state of residence, when these RSUs were granted, and in some cases, how long you have been married.

RSUs are typically divided in one of two ways.

1. The employee partner can keep the RSU grants and “buy out” the other partner’s share using the current valuation.
2. The other option is known as Deferred Division. With this version the relevant partner holds the unvested RSUs until they are released, and they both receive their share at that time.

In analyzing how to divide RSUs during a Divorce, the court will look at the employer’s intent. If the employer’s intent in granting the unvested options was to compensate the employee for past employment or current services, the options are community, and the Hug Formula is applicable. If the intent was to provide an incentive for the employee’s future performance, the Nelson Formula should be used. This “which time-rule formula,” that Arizona applies refers to the Hug and Nelson formulas, from caselaw out of California.

• Employee Stock Purchase Plans allow an employee to buy stock on a regular basis at a discounted price, and the shares can either be sold or held for more than a year.  Purchased shares via an employee stock purchase plan can also be sold
  immediately if preferred. 

• Deferred Compensation Plans allow an employee to elect to defer a portion of their compensation or salary, usually made available at the time of retirement, and may be matched in total or up to a certain percentage by the employer. These deferrals may be salary, bonus, or even equity compensation. In some cases, the employer will match the deferrals. Deferred Compensation plans are completely discretionary, so any Spousal Maintenance would be based on the total compensation before any deferrals. Any balances in the plan are likely marital property as well and should be analyzed carefully. Most plans are distributable at retirement, but some plans allow distributions during employment as well. These Deferred Compensation Plans can also be either qualified, pre-tax
  contributions or non-qualified. 

• Payment and use of a company vehicle, cellular phone, computer or complementary gym, or country club membership.

In a Divorce, each of these benefits will need to be accounted for as divisible assets or for the calculation of Spousal and Child Support. Those calculations can be difficult, and having an attorney who specializes in High Net Worth Divorces will be vital for ensuring the best possible results in a convoluted situation.

Tracing Assets

If Separate Property is co-mingled with Community Property, then can be consider all Community Property. This is generally done by mixing funds, otherwise known as “Co-mingling”.  This is often done when a spouse adds their income during marriage to an account that they had before marriage, and then make various transfers and expenditures from such account. If there has not been very much Co-mingling, you may be able to “trace” what portion of the account is a community and what portion is separate. However, if the Co-mingling is too extensive, you may not be able to trace the separate portion to the extent required by the law. In that event, the separate portion of the funds are not “explicitly traceable,” and thus the entire pot becomes Community Property and subject to division. If the funds in the account are substantial, a Forensic Accountant is often retained to determine if the funds can be traced to the extent required by the law.

Forensic Accountant Expert

During a Divorce, a spouse may try to devalue their assets in an attempt to pay less in Spousal Maintenance, Child Support, and other financial obligations. Depending on the nature of these assets, they could become a hiding place for money that you are rightfully entitled to.

Often times, placing a value on specific assets involves tracing property ownership to determine what assets are shared marital property versus one’s separate personal property. The “Valuation Survey” often accounts for items like:

• Real estate
• Vehicles
• Art
• Jewelry 
• Wholly or partially owned businesses
• Stocks and bonds
• Cryptocurrencies
• High-value collectibles
• Shared marital assets
• Retirement plans
• Determining True Income

Compiling a complete picture of a spouse’s assets helps a Forensic Accountant to determine their true income with greater certainty. For example, if the other party claims their income is completely based on the salary they receive from their day job, but they have other assets that are not currently generating income but have the potential to do so, they can calculate how these contribute to overall income and make a determination.

Totaling a spouse’s true income plays an instrumental role in determining payment amounts for Spousal Maintenance and child support. Without this complete picture, you may not obtain the full financial support to which you could be entitled.