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It is not uncommon for one or both spouses to own a part of some type of business. And, when it comes to a divorce, that ownership interest might be ”property” that the court has to include in a property distribution, the division of the parties’ property, and so it becomes necessary to place a value on the business.
Courts generally have wide authority to decide what is equitable (or fair) when dividing property, and in most states, only marital property will be divided.
The valuation of a business involves numerous factors, such as:
- What the business owns and what it owes
- The business’s income
- What formula or method should be used to determine value
- The valuation date
Business valuation is usually a very complex process, and more likely than not it will require the use of experts, appraisers, and people who are experienced in business operations.
What Does the Business Own and Owe?
There can’t be a valuation of any business without knowing what it owns, which includes:
- ”Tangible” property, like inventory, office equipment, and manufacturing machinery, and
- ”Intangible” property, like patents, trademarks, and ”goodwill,” that is, good customer relations
It’s possible that some of these assets are ”marital assets” and so they have to be included in the property distribution regardless of any division of the value of the business as a whole.
For example, if one spouse owns a patent before the marriage, and after the marriage he or she starts a company that sells the patented-product, some states require that the patent be awarded to the owner-spouse in the property distribution, while other states might require that the couple share in it’s value. Nonetheless, independent of how the patent is divided or distributed, the patent will be considered in valuing the company for purposes of dividing the company between the parties.
Again, the distribution of property, including a business interest, is controlled by state laws, which vary greatly from state to state. So, be sure to read the laws in your area, or consult an experienced divorce attorney.
What the business owes (”liabilities”) is just as important as what it owns (”assets”). ”Liabilities,” generally, come in the form of money, goods or services that the business owes to others. So, a company’s value is sometimes viewed as: the sum of the liabilities minus the sum value of the business assets.
How Much Money Does the Business Make?
Usually, the profitability of a business is a way of measuring its value. Profit is determined by subtracting the business’s expenses from its income.
Expenses include the direct costs of producing the goods or performing the services that the business sells, as well as items like overhead – expenses that are necessary to keep the business running – such as rent and utilities.
Income is the total amount of cash received from the sale of goods or services and other business-related activities, such as investment income or gain from the sale of business assets, like equipment.
Because of the numerous ways in which ”profit” can be calculated, and because businesses differ greatly on how ”income” and ”profit” are recorded in their books, you need to carefully read the business’s financial records and books so that the ”profit” can be determined accurately.
There are several methods that can be used to value a business, but the two most commonly used are: the book value method and the earnings or market approach.
The book value method is based on the values of the assets and liabilities as they are listed on the corporate books. The value of assets on the books is frequently the original cost of the asset:
- Minus depreciation – the decrease in value that is caused by age or normal wear-and-tear,
- And adjusted for things such as an increase in value
The earnings or market approach is based on the market value or earning capacity of the business: what an outside buyer or investor would pay for the business, taking into account the future earning capacity of the business.
Date of Valuation
The purpose of any valuation of a business in a divorce or dissolution proceeding is to determine its fair market value so that a court can make a fair property division.
Value on the date of the marriage is not very useful because it does not take into account that changing economic circumstances can make assets that had been valuable months or years earlier virtually worthless in the present, and vice versa.
In addition, such a date does not account for increases in the business’s value during the marriage, which increased value, in itself, might be subject to the property division, depending upon the state’s property distribution laws.
So, any business should generally be valued as close to the time of distribution as possible.
Questions for Your Attorney
- What kind of records or information do I need to get in order to determine how much my soon-to-be ex-spouse’s company is worth?
- Can my spouse and I agree on the value of the business that we started after we got married, or do we need to hire expense experts or accountants?
- Instead of splitting the business, can’t I just buy my ex-spouse’s share of it?