How are businesses valued in divorce?

| Oct 13, 2020 | Family Law

Valuing a business is often a complex process where each analyst will arrive at a different amount. While a car has a blue book value and a house has a market value, businesses (particularly small ones) can be hard to value. The waters can be further muddied by the owner’s goals – who may want the numbers to skew higher if their selling and lower if they are dividing an estate during a divorce.

Since business owners and entrepreneurs often start or build up a company during a marriage, it often is regarded as a marital asset. The notable exception will be a binding prenuptial or postnuptial agreement stipulates that the owner need not share the asset with a spouse.

Valuing the business

In instances where the business is smaller, the two sides and their attorneys may try to work it out among themselves. But the owner and their spouse will each likely want business valuation experts who can testify in court if the company is a significant asset. The attorney or valuation expert will want to weigh the following as well as other factors:

  • Assets: This should include all tangible property, savings accounts, inventory, equipment, as well as intangibles like reputation, intellectual property, and likely growth potential.
  • Debt: Some businesses are leveraged by a large amount of debt, though they should scrutinize that debt’s nature and when the company assumed the debt. Operating costs, taxes, financial, and business obligations are also considered.
  • Profits: This generally involves income versus operating costs and should be calculated over a longer period to even out the seasonal peaks and valleys and economic cycles.
  • Book value versus market value: The former is the amount on the ledgers and based on numbers reported to the IRS. Market value reflects the earning capacity and essentially considers how much the business’s sale would fetch on the open market.
  • Timing: Spouses need to consider that the appraisal’s value may have changed if done several months or a year before the court hearing begins.
  • Irregularities: Attorneys and experts valuing the business will also look for owners who do not pay themselves, pay themselves too much, or attempt to defer company income until after the valuation.

A common exercise in family law

Family law attorneys often work with business owners and their spouses, so they usually have a good idea of what the business is worth. Or, as mentioned, they can turn to valuation experts or forensic accountants they can use. All these considerations can help ensure the most accurate valuation possible.