How to Value a Business in a Divorce
Divorce is difficult for any couple, but it becomes especially complicated when a business is involved. In divorce proceedings, the business valuation process strives to provide a fair and accurate assessment of a business's worth.
Whether a business is a primary income source or a joint investment, an accurate valuation informs decision-making, negotiation, and resolution. It promotes transparency and fairness as the couple navigates the complex financial aspects of divorce.
Why Do You Need a Business Valuation in Divorce?
A business valuation helps a divorcing couple achieve equitable distribution of assets. It makes it possible to assess the business's fair market value and helps inform divorce lawyers who advocate for fair distribution of assets for their clients.
As negative as a divorce case can be for both parties, the intent behind determining the value of the business is to prevent disputes and promote equality between parties.
The valuation becomes even more important as the divorce attorneys work to distinguish business assets from marital assets, especially when both parties operate a business. In cases where one spouse owned the business before marriage or inherited it, an accurate valuation of the separate property helps delineate its value.
Calculating Self-Employment Income for Support
A business owner’s self-employment income is a factor when child support, child custody, and alimony are determined during divorce proceedings. This precise calculation considers the value of a business based on present value, as well as future earnings.
Valuation Issues During Divorce
Complex scenarios can complicate valuations. "Double dipping" is one scenario where an asset's value is considered for both marital property division and spousal support and can lead to inequities in the divorce proceedings.
In cases involving family businesses (including married business partners), the business's true value and its role in property division must be considered. Guidance from your business valuation expert and collaboration with your divorce attorney is the best way to ensure a fair resolution.
How to Value a Business
The divorce process often involves the complex task of valuing shared business interests. Understanding the process is important for equitable distribution.
When you need to determine the value of a business, consider start by engaging a certified business appraiser, or a business broker with experience in valuing businesses in your industry. Work with the appraiser or broker to define the scope of the valuation and discuss their methodology based on experience with similar businesses. You’ll want to know how they perceive tangible assets, intangible assets, cash flow, capitalization, future earnings, and liabilities. The appraiser or business broker may recommend either the income, asset-based, or market approach. They may also refer you to a forensic accountant who can audit the business beyond tax returns and balance sheets.
Involving your divorce attorney throughout the valuation is important. They can share legal advice based on the valuation methods. Their job is to help you understand the implications for asset distribution during the divorce proceedings and advocate for a fair resolution.
When real property assets need to be considered during the business valuation, hire a real estate appraiser to assess property values. This third party will coordinate with your divorce lawyer and business appraiser to ensure an understanding of the real property appraisal and the overall business valuation.
State-Specific Considerations
Navigating the complexities of divorce requires a nuanced understanding of state-specific considerations in business valuation. A business appraiser and lawyer can speak to local guidelines regarding the approach to valuing assets. They will also help clients distinguish between fair market value and fair value.
- Fair Market Value: Assumes that both parties have reasonable knowledge of the relevant facts, act in their best interest, and are not under any compulsion to buy or sell. It’s often used in tax assessments, buy-sell agreements, and financial reporting.
- Fair Value: Considers factors beyond market conditions, including discount rates, premiums, and specific valuation methods. It’s commonly used in legal contexts such as shareholder disputes, divorce proceedings, or regulatory compliance.
Understanding the difference is important as it influences the determination of community versus separate property and shapes asset distribution.
Actions taken during the marriage, such as investments or transfers, can further complicate matters, affecting the final distribution. Community property refers to assets and debts acquired during the marriage and is considered jointly owned by both spouses in community property states. On the other hand, separate property valuation considers the assets or debts of one spouse before the marriage or assets acquired through specific means (such as inheritance or gifts).
When Does a Business Owner Have to Sell a Business?
The decision of a divorcing business owner to sell their business is a complex and nuanced choice. Factors can include:
- Financial strain, making it difficult for the owner to operate and meet financial obligations
- Division of assets to achieve fair asset distribution
- Poor market outlook, as determined by the business valuator
- Changing personal priorities
- Disagreements between married spouses who also co-own the business
That said, divorcing business owners may explore various legal options and alternatives instead of immediately selling the business. Those options include:
- A buyout agreement where one spouse buys the other spouse’s interest in the business
- Amicable co-ownership arrangement
- Division of other assets to avoid disrupting the business
- Deferred sale to allow one spouse to continue to run the business and share profits with the separating spouse
Visit the BizBuySell Valuation Learning Center for more information on valuing a business for sale. To get an estimate of the value of your business, use the BizWorth Calculator to see a valuation range for your business based on your geographic area, cash flow multiples, and BizBuySell’s inventory of comps and active listings.