April 26, 2023

Spouses filing for divorce are always concerned about their finances and how their debts and assets will be divided. When spouses own a business, the stakes are even higher. Divorcing spouses may be surprised by the value assigned to their business during the divorce process. If you are filing for divorce and own a business, it’s important to hire an attorney who understands the process of business valuation in the case of divorce.

The Income Approach to 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.

The Market Approach to Business Valuation

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 Business Valuation

The asset approach to valuation puts the emphasis on the difference between the fair market value of the assets and 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.

Other Factors in Business Valuation When Filing for Divorce

You will certainly need the help of your attorney when filing for divorce, particularly when there is business ownership at stake. Self-employment income will need to be calculated when determining spousal and child support. There is also the idea of “double dipping”, where a spouse may be awarded twice on income generated by the business and on calculating individual income available for support. Your attorney should be aware of this potential issue and work to make sure you are treated fairly. In addition, your attorney will likely make sure that no assets are concealed, be they personal or business assets. A forensic accountant may be needed to ensure the valuation is fair and accurate.

When Filing for Divorce, Partner With the Right Attorney

While your most important ally when filing for divorce is your attorney, you also need to protect your business. Your attorney can do many things to help you, but they can’t offer expert testimony on the value of your business. An experienced divorce attorney will have a network of professional referrals to fill in the gaps where you need support. Testimony as an expert must come from a business appraiser or valuator. Most judges are also not experts in calculating the value of a business, particularly when based only on tax documents. Therefore, a business appraiser is well worth the investment during the divorce proceedings. They have the knowledge to get the right information to the judge, and then the judge can make a fair ruling about your business.

If you are filing for divorce and own a business, it is in your best interest to get a valuation from an expert. Every business has value and that value will be considered during the divorce process. Your attorney can help you by recommending the right experts to ensure that, when filing for divorce, everything is considered fairly. If you’re going through a divorce and looking for experienced legal representation, contact my office today.