If you and your spouse are divorcing, dividing assets can be complicated. If you and your spouse own a small business together, the division of assets becomes a bit more challenging. Business valuation in a divorce is one of the most complicated tasks in family law and almost always requires the help of a CPA. Divorce and business valuation will usually require full access to the business financial records, including tax returns, inventory records, assets, cash flow, debts, and all bookkeeping files. Both spouses, regardless of their stake in the business, will get some value during the divorce process.
There are three approaches used by most experts and CPAs when working with divorce and business valuation. Each method has advantages for the business owners, and your divorce attorney can look at the business and determine which approach will be the most useful for the purposes of divorce and business valuation.
The income approach is complicated, but it’s also the favored method for valuation due to the accuracy. The income approach uses the company’s past performance to estimate future earnings. The future income is then used to calculate the current value. This is best used for stable companies that generate steady earnings with slow and stable growth. This is a complex method, but is often preferred when the divorcing party may need to sell the business.
If the business may be sold in the near future, the market approach works a lot like a real estate appraisal. The business will be analyzed, then compared to similar businesses in the region that have recently been sold. Franchise businesses are often valued using this method, because there are an abundance of similar businesses to compare the company to. In this method, they will look at the profitability, gross sales, and other factors. However, if the business doesn’t have a good comparison, this method isn’t always the most accurate.
The asset approach to valuation puts the emphasis on the difference between the fair market value of the assets and the liabilities of the business. The asset approach is usually used when the valuator has difficulty generating a value using the income approach, often because the company generates insufficient income or cash flow. Sometimes the asset approach is used because the valuator can’t establish comparable sales, and sometimes the assets may exceed the values projected by the other approaches. This approach is best for companies that are struggling to make profits or companies that have a large inventory of assets, and the assets are worth more than the debts.
Your divorce attorney will not perform the business valuation directly, but your attorney should have a detailed understanding of your divorce and business valuation. Your attorney will need to know how to interpret the business valuation in order to protect the business and your interests, and how to use the numbers presented to calculate child and spousal support, if indicated. If you own a small business, you should look for a divorce attorney who has experience working with small business owners and the complexity of divorce and business valuation.
When you own a business and are going through a divorce, you are likely trying to balance protecting both yourself and your business. Although you want to separate from your spouse, you do not want to lose your investment in your business. A good divorce attorney with experience in business valuation will be a true asset to your divorce proceedings. If you’re going through a divorce and need representation, please contact my office today.