October 26, 2022

Spouses filing for divorce are always concerned about their finances and how their debts and assets will be divided. When one or both spouses own a business, dividing assets becomes a bit more complex. Divorcing spouses are consistently 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 how businesses are assigned value.

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.

Factors to Consider in Business Valuation

You will certainly benefit from the help of an experienced attorney when filing for divorce, especially 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 income available for support. Your attorney will be aware of this potential issue. In addition, your attorney will 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.

Hiring an Experienced, Local Divorce Attorney

Your most important ally when filing for divorce is your attorney. If you own a business, you need to protect yourself and your business, and your attorney will be your guide. It’s important to note that your attorney can’t offer expert testimony on the value of your business as an asset. To give testimony as an expert, it has to come from a business appraiser or valuator. Most judges are also not experts in calculating the value of a business based only on tax documents. Therefore, a business appraiser is well worth the investment, and your attorney will be a great resource for finding the right approach. They have the knowledge to get the right information to the judge to make a fair ruling about your business asset.

If your divorce includes a business as an asset, expect a valuation from an expert. Every business has value and that value must be considered during the divorce process. Divorce is an emotional, complex process and it can be much easier with a trusted attorney by your side. If you’re going through a divorce and you’re looking for a trusted, experienced divorce attorney in the Toledo area, contact my office today.