Business Valuation in Divorce Matters

Unless you have a prenuptial agreement, starting and / or owning a business can lead to a very messy divorce.

There is more than meets the eye when it comes to divorce with a business involved.

Divorce with a business is not a one-size-fits-all topic and every couple’s situation, circumstances and determining factors are unique.

So coming to a fair agreement with your soon-to-be ex-spouse requires more than just a passing conversation or a wild guess. And as you’re seeing, there’s a lot involved in this highly complex matter.

In the majority of cases, this issue is much too complex for you to attempt to determine on your own. Especially if your divorce involves real property or business assets.

Factors that must be considered include:  when did the business start, whose name is on the business, who actually operates the business, is the business separate property or marital property or both?

Business Valuation in Divorce

There’s more than one method for valuing businesses and the various methods can produce wildly different results.

At a high level, the three methods are:

1. The Cost Approach which is based on the fair market value of a business’s net assets;
2. The Market Approach which values a business based on what other similar businesses have sold for in the recent past;
3. The Income Approach which uses projected earnings to derive a present value for the business.

Depending on the type of business you have, one approach may be more suitable than another.

How do you reconcile that?

Let’s say you’re one of the 28% of Americans who is a small business owner and you want to sell your business ownership – and in this example, you’re NOT also getting a divorce. Naturally, you’d want to use the valuation method that resulted in obtaining the highest sales price for your business. And your spouse would want to use that valuation method, too.

But since you are getting a divorce, and your business will become a marital asset subject to equitable distribution in New York, you might want to use the valuation method that resulted in the lowest business’ value, or the highest value.  Depending on which is in your best interest.  

The best method to divide a business in a divorce case isn’t the same for everyone.

Just as there are various methods to value a business, there are also numerous options for how to divide a business in a divorce. And the option you choose is entirely dependent on your unique situation.

Here are a few examples…

1. You could sell the business.  On the surface, this might seem to be the easiest way to go. Whatever proceeds you receive from the sale you and your spouse could divide as you see fit.

2.  You and your spouse could continue to co-own the business.

Another way to “divide” a business may be to not divide it at all. If you and your spouse are getting a divorce when you own a business together, and you each play an active role in operating it, you may wish to leave things as-is. On the surface, this may seem like a good idea as it eliminates the need for a valuation at the time of your divorce. And removes this asset from your divorce negotiations. It also allows each of you to enjoy the “perks” of the family business, maintain your current salaries, and share in the net profits of the business.

3.  You could buy out your spouse’s business interests.

There are pros and cons to each valuation method and each distribution method.  Contact us so that you can walk you through each option.