If a business is owned by one or both of the parties, it’s a good idea to get a business valuation from a private expert. If the business was acquired during the marriage or if it was operating during the marriage, it is considered a marital asset, and likely subject to equitable split between the two parties, regardless of who actually owns the business on paper.
During divorce proceedings, any asset, both tangible and intangible, will be included in the divorce process and will be subject to allocation between the two parties.
To your chagrin or delight, that includes your business. This is where a fair divorce business valuation comes in.
Business valuation during a divorce can be a major part of both property division and alimony (or spousal maintenance), and a good business valuation expert can help you determine the fair market value of your business and business assets.
If you’re worried about how your family’s assets might be split, including a business asset, Alithis Family Law is here to help you protect yourself, your future, and your business throughout your divorce proceedings. On this page, you’ll learn:
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When you need a business valuation for your divorce
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Various approaches to business valuations
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How your divorce attorney protects you
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Frequently asked questions regarding business valuation in divorce
And when you’re ready to talk to an attorney with experience navigating complex divorces, splitting illiquid businesses, and other issues common to high net worth divorces, we’ll be ready.
Do You Need a Business Valuation For Your Divorce?
Business valuations are a complex part of the divorce process, even if you or your spouse’s interest in the business is not significant, or even non-existent.
Here’s why:
A business that’s been run during the marriage – by one or both spouses – is considered marital property. Even if it’s not jointly owned on paper, the business will need to be considered jointly owned as part of the divorce process. During a divorce case, your particular business may be in question for equitable distribution of the marital estate.
Because of this, the business’ valuation can impact you and your spouse significantly, and proper valuation can ensure both parties receive “their fair share” during the divorce.
Done right, a business valuation can even help you protect your business and preserve your own income for the future.
A Business Valuation Example
Let’s look at an example.
Imagine a 45-year old couple who are preparing for a divorce. The wife has been home raising children for 15 years, putting her career on hold to take care of the kids. Her husband has built a business as a home builder and contractor, with ten employees, over $400,000 of heavy machinery, and revenue from the business of over $3 million annually. He brings home $500,000 per year as CEO of this mid-sized business.
In our example, let’s assume the business owner’s income has also been used to build a small portfolio of rental properties: this LLC has $1 million of rental properties throughout the state.
In this divorce, who should keep the business and rental properties?
How should the business be valued?
And if no one has enough cash, how will one spouse be compensated if the other retains the properties and/or business?
These are all excellent questions with no single answer, but an understanding of business valuations and how to best protect your future – with the help of an experienced attorney – can go a long way in a fair and compelling outcome from this divorce.
Different Approaches To Business Valuation
Don’t let your spouse dictate the value of a business that’s contested in the divorce. A valuation expert trained and experienced in business or property valuation can help. And it’s typically well-worth the expense.
A business valuation report from an expert business appraiser can impact your estate as a whole. Whether you have a sole proprietorship or a limited liability company, these assets net a significant amount of value that can impact the value of your divorce.
To conduct a comprehensive business valuation, the financial expert will need to understand the particular type of business, the local market, and the business’s reputation. A good expert will also look at the goodwill of the business (or good will towards the business), the number of customers, the business’ reputation in the community, and the financial and sales information when making a determination on the value of the business. Factors will include:
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Cash flows
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Accounts receivable
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Inventory
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Equipment
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Intellectual property
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Business goodwill
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Reliance on a single employee or party
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Liabilities
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And more!
Generally speaking, however, there are three primary approaches to valuing a business, each with their pros and cons.
Income Approach
A revenue-based or income-based approach to valuing a business is built on how much the business makes in a given year. This number, or an estimate of this number into the future, then receives a “multiple” to determine fair value. The approach rests on the fact that the income from a business, over the course of many years, is worth more than that income today.
In the case of our example above, a business valuation professional will take a look at the profit and loss statement and decide that $500,000 of annual income from the contracting business, which will theoretically continue far into the future, might be worth $1.5 to $2 million today. That amount must then be split equally between the spouse and owner.
This method can convert anticipated economic benefits into a specific value that represents the business today.
Asset Approach
Sometimes it’s more relevant to value a business based on its assets.
Often, if a business is struggling to turn a profit, or if that business requires significant tangible assets like real estate or expensive equipment, an asset approach maybe more useful for determining the value of the business.
In our example above, while the home-building business owns $400,000 of machinery to do their work, this probably isn’t the most fair way to think about the long-term or even fair market value of the business. However, the husband’s sole business ownership interest in the real estate portfolio is likely easily valued by looking at the equity in those properties.
Market Approach
When using the market approach, your business appraisers may look at similar businesses in the same industry sold in the last 1 to 3 years to determine the worth of the valuation subject. If a 10-employee home-building business doing similar revenue fetched $2 million last year, that’s a great starting point for the fair value of the contracting business in our example.
In some ways, a market approach to valuing the business may be most appropriate, demonstrating a valuation based on the entire picture of tangible and intangible assets (like goodwill), hard assets, ownership interest, and more. Rather than looking at the business’s financial documents or financial statements alone, this approach is in some ways the most accurate: what are other people paying for the same kind of business?
A real estate appraisal may be a part of this approach, too.
Unfortunately, companies for comparison can be hard to find for small, private businesses in particular; a publicly traded company is generally not a good comparison (though it can be if you or your spouse own public stock) to determine your private business value. You may have a family business that serves a highly specific niche, making a comparison harder than ever and finding a willing buyer harder than ever, too
What Happens If The Business Can’t Be Sold or Made Liquid to Be Split?
In many cases, a business (like in our example) won’t be easy to split between the two spouses.
In that case, the spouse who wants to retain ownership of their business may have to come up with cash by taking on debt to pay out the former spouse. Or, they may decide that it makes sense for one spouse to keep the real estate, and the other to take the business.
Or, one spouse may be willing to give up ownership in exchange for significant spousal maintenance payments.
An experienced divorce attorney with the help of business valuation experts can help you and your spouse sniff out what’s best for you.
How Your Attorney Works with a Business Valuation Expert
Determining the value of a business can meaningfully impact the outcome of your divorce.
The spouse in our example above may be eligible to receive 50% of the business during property division – and 50% of $2 million is a whole lot more than 40% of $400,000. And, the fair market value of the real estate portfolio may be much higher than a simple look at the owner’s equity.
Business interests are notable both for asset division and alimony, too. How and if assets are divided can determine how a judge perceives each spouse’s income stream into the future.
At Alithis Family Law, we’ve navigated enough business valuations and complex divorces to recognize a bad deal when we see one. If you’re trying to protect your assets or sort out your future, we can help.
Business Valuations FAQ
Business valuations are a complex subject, and if terms like “marketability discount” or “marketable securities” leaves you scratching your head, we’ve got answers.
How do you calculate the value of a business for divorce?
Calculating the value of a business typically happens through a valuation process incorporating one (or more) of the following approaches: income multiple, asset valuations, or market value.
Each has its pros and cons, and while none are perfect, they’re all recognized as a fair approach to determining the value of a business.
How do you value a sole proprietorship?
A sole proprietorship is generally valued the same way as any other business, though the fact that the organization is less complex may mean a sale or split can be accomplished more easily and more quickly.
A closely held business with one owner requires no shareholder vote, no agreements among joint owners, and frequently no valuation discounts to get a deal done – whatever that deal may be.
Does a business valuation include assets?
Yes, or generally it should.
Depending on the business, capital assets like heavy equipment, computer equipment, and other valuable assets can meaningfully impact the final valuation. Even in valuations based largely on revenue or cash flow, assets are often incorporated into the
If you’re wondering whether assets (which may include intangible assets) should or will play a role in the valuation of your business, a good business valuation expert can help.
What does a forensic accountant do?
A forensic accountant will help you uncover hidden assets by looking at tax returns, real estate documents, public records, and more.
Work With a Reputable Divorce Attorney for Help Safeguarding Your Future Today
One appraiser’s value can make a big difference in your divorce proceedings.
If you or your spouse own a business, knowing what that business is worth impacts many details of your divorce case, your taxes, and your future.
If you face a contentious divorce and are concerned about the impact of the valuation of your business, contact our office today at (952) 800-2025 or at info@alithisfamilylaw.com for a free consultation. Our experienced Minnesota divorce attorneys will work closely with you to achieve your goals.