The Business Divorce Law Report

March 10, 2024

Unlocking Your Business’s Potential: The 7 Key Reasons for Valuing a Business

Understanding the valuation of the business is critical to the owners of closely held business in planning and management.
Closely held business owners typically have most of their personal wealth tied up in their company, but rarely know the current value of the enterprise.
Current valuation data is important for strategic planning, dispute avoidance, insurance purchases and tax compliance.

Business Valuation for Closely Held Business Owners

Understanding the value of your business is critical to the management and operation of a business, to protecting the value of the business, and to planning for the future. Many owners see valuation as an issue that you need to look at at certain stages in the life of the business—wwhen someone dies or gets divorced, when it’s sold, or when there’s a tax issue.

That value, however, doesn’t consider other, crucial reasons why valuation is necessary for the business owner. The reasons are both defensive and offensive. For example, you cannot know how much insurance you need for your business if you’re just guessing about what it’s worth. You need this information for the defensive purpose of protecting your investment.

Tools that You can Use

How much is your business worth today?
You can get an immediate estimate of a range of values here.

We counsel clients on the valuation issues in their business. Contact me with with questions.

Offensively, business valuation is a strategic tool that offers insight, guides decisions, and uncovers opportunities for growth.

Business owners, on average, have about 80 percent of their personal assets tied up in their businesses. But only 30 percent of the owners of closely held businesses have a clear picture of what the business is worth. Continue reading

June 23, 2024

Use of Control Premium Inflated ESOP Stock by 61 Percent, ESOP Says

by Jay R. McDaniel, Esq.

The application of a control premium more than doubled the claimed value of a business purchased its employees through and ESOP
An investment banking firm involved in the transaction is subject to claims that it was biased because the fee it earned was contingent on the purchase price.
The valuation firm that conducted the annual valuation required by federal regulations faces claims that it was not independent.

A valuation that applied a control premium to shares acquired by an Employee Stock Ownership Plan (ESOP) would have inflated the value of the now-bankrupt company by as much as 61 percent, according to the plaintiffs in an action against the trustees of the ESOP, its investment bank and the firms that valued the business.

In a case heard by the Seventh Circuit Court of Appeals, the plaintiff’s claims of breach of fiduciary duty and engaging in prohibited transactions under the federal Employee Retirement Income Security Act (ERISA) were upheld even though the defendants wanted to dismiss the complaint. This was because the plaintiff sufficiently alleged wrongdoing in the valuation of the business.

ESOP Owning Bankrupt Company Sues Over Value Reports

The Seventh Circuit Court of Appeals in Appvion Inc. Retirement Savings and Employee Ownership Plan v. Butha held that the plaintiff’s claims for ERISA violations related to the valuation of the A valuation that applied a control premium to shares acquired by an Employee Stock Ownership Plan (ESOP) would have inflated the value of the now-bankrupt company by as much as 61 percent, according to the plaintiffs in an action against the trustees of the ESOP, its investment bank and the firms that valued the business. business after 2012 would proceed.

The gist of the plaintiff’s claims in the lawsuit is that employees approved the acquisition of the stock of the company based on the flawed valuation presented by an investment banking firm that received a contingent success fee of more than $8 million and that the annual valuations of the company were inaccurate and misleading.

March 11, 2024

Are Fiduciary Duties Different When Partners Are Involved?

by Jay R. McDaniel, Esq.

The fiduciary duties of loyalty and care may be different when a partnership is involved, rather than a corporation.
The duties that shareholders in a corporation owe to each other are different than those owed in a partnership. Shareholders have more discretion to consider their own interests first.
Understanding the duties owed by those in a business is important to avoid liability to business partners

This fight between accountants in practice together demonstrates the different ways that courts will look at corporations on the one hand and partnerships, an entity that the what the law calls an unincorporated business association. Limitied liability companies are also unincorporated business assocations.

The case is also another lesson in the course: Bad Things Happen to People Who Don’t Bother with Contracts When They Start a Business with Others.

Business-partners-discussing-a-contract-816786-1024x683

Fiduciary Duties Owed Between Partners

The takeaway from this case is that the duties that shareholders owe to each other are different from the duties that partners and LLC members owe to each other. That is not to say that there are no duties between shareholders in a closely held corporation, but those duties are not presumedto exist. They have to be proven from the circumstances. We will discuss some of the differences as we go through the details of the case.

Why does this matter? Because understanding the duties owed by those in a business is important to understanding the rights and liabilities of those involved, Those who have fiduciary obligations are personally liable when they ignore these duties. And those who are owed the fiduciary duty have a right to hold the fiduciaries responsible.

Accounting Partnership Dissolves

This dispute between the accountants turned into a lawsuit. The combatants were involved in Forward LLP, a poorly documented accounting partnership. Kristina Edwards and Sean Forman were locked out of the business, but they went to court and got temporary restraining orders (TROs) by the trial court.

These allowed them to get back to using Forward software, email, Google Drive, and client files and communications at the outset of the case. The defendants appealed that decision and lost.

The case we are looking at is from the California Court of Appeals, Edwards v. Forward, but the legal principles here will apply in most states, including New York and New Jersey, where I practice. Continue reading

March 8, 2024

Closely Held Businesses Can Use Agreements to Protect Value

by Jay R. McDaniel, Esq.

Agreements that limit former employees from soliciting customers or disclosing confidential information are critical to protecting the value of a closely held business.
Restrictive covenants and non-compete agreements are difficult to enforce and must be carefully drafted to assure that they are enforceable.
Closely held businesses should rely more heavily on contracts to prohibit solicitation and disclosures.

Restrictive covenants such as non-compete and non-solicitation agreements are vital to the stability of a closely-held business. Let’s examine how these agreements can be used to protect the value in the most important drivers of value, the intangible assets in your businesses.

Female-entrepreneur-signing-514339-1024x683

Female entrepreneur in casualwear sitting at wooden table and signing contract after successful completion of negotiations with business partner, close-up shot

Intangible assets are things like intellectual property, customer relationships, and proprietary information. Businesses can prevent employees or rivals from misappropriating these assets by implementing effective restrictive covenants.

Securing these intangible assets is essential in the business world for preserving a competitive edge, achieving long-term success, and increasing a company’s worth.

Contact me to answer your questions about restrictive covenants and how they should be used in your closely held business.

Are Restrictive covenants Becoming Unenforceable?

The restrictive covenant, however, is under attack from a number of sources. They may be difficult to enforce and in some states unlawful. Continue reading

March 5, 2024

Intangible Capital Holds the Key to Value in Closely Held Businesses

by Jay R. McDaniel, Esq.

Intangible Capital are the elements that define a company’s real earnings capacity and its value.
The Exit Planning Institute recognizes four intangile capitals in a business: human capital, structural capital, customer capital and social capital.
Intangible capital is closely tied to the intangible assets of a business, which commonly represents 80 percent of the value of a business.

We talk a great deal about how the most important assets of your business are those that can’t be seen or touched. I want to discuss something that exIt planners refer to as intangible capital. Intangible capital groups your intangibles into four classes that a business owner can identify, strengthen, and, in the process, grow their companies and make it more valuable.

Understanding Intangible Assets and Their Effect on Value

The most important and valuable assets of almost every business are the intangibles. They’re something that you can’t find on a balance sheet, but something that you need to understand, protect, and cultivate.

And they are critical to the business owner who is seeking to maximize the value of the business and who is planning an exit strategy.

Tangible assets are things like machinery, real estate, inventory, intangible assets, or things like intellectual property, patents, trademarks, copyright, brand recognition, customer relationships, goodwill, unique processes, and other kinds of proprietary technology. Continue reading

March 4, 2024

Court Relies on Implied Contract Theory To Hold Partner to Agreement

by Jay R. McDaniel, Esq.

It’s a decision involving a law firm partnership that, if widely followed, will likely have a sweeping effect on the interpretation of the statutory requirement for unanimity in adopting critical agreements that govern partnerships and liited liability companies. Lerner-David

Attorney Andrew Zidel, an attorney who left prominent intellectual property boutique firm Lerner David in Westfield, failed in his attempt to use a minority veto to block the adoption of a law firm partnership agreement that treated retiring partners differently than withdrawing partners.

The trial court finessed the unanimity requirement found in the partnership statute, and was affirmed in an unreported decision of the appellate division.

Court Discounts Literal Language of Partnership Statute; Implies Consent to Adopt Partnership Agreement

The reason for Zidel’s failure to rely on the language of the statute was that the law firm had, for many years, operated without a formal partnership agreement. Therefore, the trial court found that the written formal agreement would be considered an amendment to the existing partnership agreement, and, under the partnership’s prior practices, it did not require a unanimous agreement.

March 3, 2024

Human Divorce, Meet Business Divorce

by Jay R. McDaniel, Esq.

Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.
An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.
The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

The divorcing couple that owns a business together has to manage the family and business relationships simultaneously. That typically involves terminating their relationship as well.

And if one of the parties owned the business before the marriage, such as a stake in a family business, it means dissecting the interests of the divorcing spouses in a way that may implicate the interests of still others.

portrait-of-a-confident-young-man-and-woman-workin-2023-11-27-05-08-51-utc-1024x683

Portrait of a confident young man and woman working together on a farm.

In a recent case before the Supreme Court in Montana, the issue was how to deal with a distribution of property when one of the sons of a ranching family was divorced from his wife after more than 30 years of marriage.

Business Divorce Issues Related to Divorcing Business Owners

The wife claimed an interest in the limited partnership that owned the ranch and argued that it should be valued for the purposes of the parties’ property settlement and not as a family business. The limited partnership vigorously disputed that she had any interest in the business.

Contact us for more information or to discuss your issue on business governance issues.

The case, In re Frost, relies on the liberal provisions of state law that provide that anything owned in whole or in part by the married individuals is distributable in a divorce. The trial court rejected the claim of ownership, but the award in some ways treated the rancher’s wife as if she had. Continue reading

November 8, 2023

Retroactive Expulsion of LLC Member

by Jay R. McDaniel, Esq.

The effective date of an LLC member’s expulsion may be a critical issue in business divorce litigation and may be tied to critical events or the litigation.
Courts will look at the facts and circumstances of the case before determining the effective date, but are often guided by the parties’ own intent.
A court may give the expulsion a retroactive date, often the date that litigation was commenced.

One of the issues that is often near the center of a dispute over the removal of a member from a limited liability company is when the expulsion should be effective. In other words, if the plaintiff succeeds in getting an order expelling a member, is it effective when the order is first entered or does it relate back to some other event or date?

October 31, 2023

Defending the Oppressed Minority Lawsuit

by Jay R. McDaniel, Esq.

Majority Owners of closely held businesses may face claims that they engaged in minority oppression of shareholders, limited liability company members or partners.
Defending the minority oppression claim requires examination of written agreements and consideration of the reasonable expectations of the owners when the business was formed.

Claims of minority oppression are asserted in any number of disputes between the majority owners of a business and one or more of the minority interest holders. The oppressed minority lawsuit is disruptive, expensive and can threaten the investments and value of the majority owners.

October 24, 2023

Arbitration Fails to Resolve Business Divorce Dispute

by Jay R. McDaniel, Esq.

The failure of the parties to submit evidence on an issue during arbitration caused a failure to decide all of the issues of the dispute.
A Court may modify an arbitration award rather than vacate and permit partial enforcement while permitting litigation of claims were not included in an arbitration hearing.
Failure to clearly define the mechanics of an arbitration and to agree on the issues that the arbitrator is to decide can make an award unenforceable.

This court decision addresses a recurring issue when parties agree to resolve their dispute by arbitration: exactly what was it that we agreed to arbitrate? Unless the answer to that question is clear and unambiguous, trouble is likely to follow. Continue reading

Understanding the valuation of the business is critical to the owners of closely held business in planning and management.

Closely held business owners typically have most of their personal wealth tied up in their company, but rarely know the current value of the enterprise.

Current valuation data is important for strategic planning, dispute avoidance, insurance purchases and tax compliance.

Tools that You can Use

The application of a control premium more than doubled the claimed value of a business purchased its employees through and ESOP

An investment banking firm involved in the transaction is subject to claims that it was biased because the fee it earned was contingent on the purchase price.

The valuation firm that conducted the annual valuation required by federal regulations faces claims that it was not independent.

ESOP Owning Bankrupt Company Sues Over Value Reports

The fiduciary duties of loyalty and care may be different when a partnership is involved, rather than a corporation.

The duties that shareholders in a corporation owe to each other are different than those owed in a partnership. Shareholders have more discretion to consider their own interests first.

Understanding the duties owed by those in a business is important to avoid liability to business partners

Fiduciary Duties Owed Between Partners

Accounting Partnership Dissolves

Agreements that limit former employees from soliciting customers or disclosing confidential information are critical to protecting the value of a closely held business.

Restrictive covenants and non-compete agreements are difficult to enforce and must be carefully drafted to assure that they are enforceable.

Closely held businesses should rely more heavily on contracts to prohibit solicitation and disclosures.

Are Restrictive covenants Becoming Unenforceable?

Intangible Capital are the elements that define a company’s real earnings capacity and its value.

The Exit Planning Institute recognizes four intangile capitals in a business: human capital, structural capital, customer capital and social capital.

Intangible capital is closely tied to the intangible assets of a business, which commonly represents 80 percent of the value of a business.

Understanding Intangible Assets and Their Effect on Value

Court Discounts Literal Language of Partnership Statute; Implies Consent to Adopt Partnership Agreement

Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.

An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.

The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

Business Divorce Issues Related to Divorcing Business Owners

The effective date of an LLC member’s expulsion may be a critical issue in business divorce litigation and may be tied to critical events or the litigation.

Courts will look at the facts and circumstances of the case before determining the effective date, but are often guided by the parties’ own intent.

A court may give the expulsion a retroactive date, often the date that litigation was commenced.

Majority Owners of closely held businesses may face claims that they engaged in minority oppression of shareholders, limited liability company members or partners.

Defending the minority oppression claim requires examination of written agreements and consideration of the reasonable expectations of the owners when the business was formed.

The failure of the parties to submit evidence on an issue during arbitration caused a failure to decide all of the issues of the dispute.

A Court may modify an arbitration award rather than vacate and permit partial enforcement while permitting litigation of claims were not included in an arbitration hearing.

Failure to clearly define the mechanics of an arbitration and to agree on the issues that the arbitrator is to decide can make an award unenforceable.