Business Valuation in Divorce
UPDATED: August 21, 2012
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Dividing a business owned by one spouse can add a level of complexity to a divorce. If a court decides the business is considered marital property, the value of the business must be determined and divided between the parties.
In a community property state, the value may be subject to a 50-50 split. In other states, the value of the business will be subject to equitable distribution by which the court will examine certain factors to determine a fair division, such as, (1) whether one party owned the business prior to the marriage; (2) contributions that each party made to the business during the marriage; and (3) whether there are any third parties that have an interest in the business.
Dividing a Business after Divorce
The first step in dividing a business is to determine an accurate valuation of the business. It is important to find a qualified business appraiser to conduct this valuation. Referrals for certified business appraisers may be obtained by contacting either the Institute of Business Appraisers (IBA) or the American Society of Business Appraisers (ASA).
It is advisable that each party retain their own business valuation expert, particularly if one party wants to keep the business by buying out the other's interest. Alternatively, the parties may share the cost of choosing an independent expert and agree to be bound by the expert’s valuation.
It is not advisable to rely on a business valuation prepared by the other party or his or her expert. There have been many instances when the value of a business is understated for the purpose of divorce only to increase substantially in value once the divorce has been completed.
Deciding the Value of a Business
Business valuation is conducted in the same manner whether it is performed for the purpose of marital dissolution as it is when buying, selling, or refinancing a business. In preparing a business valuation, the expert will examine the financial records of the business, including:
- Profit and loss statements over a certain period of time;
- Assets, such as equipment, inventory and real property;
- Cash flow;
- Overhead; and
- Customer good will.
The expert will also look at external factors, such as the type and location of the business, and economic conditions and trends that may affect future profitability.
After reviewing all pertinent information, the expert will determine a fair market value for the business, which is the amount of money a buyer would be willing to pay to take it over, and the future earning potential of the business. If independent experts were retained, and they have properly evaluated the business using comparable methods, the value that they place on the business should be within the same range.
After the Business Valuation
Once the business valuation is completed, the parties must decide how they want to deal with the business. For example, the business can be sold and the proceeds divided between the parties or the parties can decide to continue to operate the business jointly following their divorce.
If one party wants to keep the business and the other party does not, the party who wants to keep the business can buy out the other by compensating him or for the value of the interest in the business or by giving that party equal value in other marital property, such as the marital home.
If you or your spouse has a business at the time of the divorce, consult with an experienced attorney about dividing it before you take action.