One contentious issue that arises during a divorce is when there is a business asset and how to divide it. This is true whether the business is a professional business owned by one spouse, or a family business owned and operated by both spouses. Except in rare cases, the first step is to have the business’s worth evaluated.
How Valuation of a Business Works in a Collaborative Divorce
In a Collaborative Divorce, the couple has the benefit of a team of professionals to help guide them through their decision-making process. Before proceeding to the valuation, a neutral financial professional will help them answer the following questions:
- Is the business a marital asset?
- If it is a business where both spouses work and have an ownership interest? If so, what is their goal? Do they want to maintain the business for their children to later become involved in the business?
- Do both spouses want to continue in business together despite the divorce?
- Does one spouse want to buy out the other’s interest in the business and continue it alone?
- Do they want to sell the business, divide the proceeds, and move on?
Whatever they want for the future, there needs to be a current value placed on the business.
Importance of Valuing the Business
When the family income is generated from the business, the only way to divide it appropriately is to have a business valuation to determine its value. This is done by a professional whose specialty is valuing businesses.
What is the fair market value? One way of evaluating the business is to determine the fair market value. This is how real estate is valued and the value of the business is determined by what other similar businesses have recently sold for in the same geographical area. This works for some businesses and the benefit is that when the couple is informed of the fair market value of the business, they can then amicably agree for one to buy out the other’s interest at an agreed-upon market price or to sell it and divide the profit. This often results in an amicable division of this asset.
The income approach. Another way to value the business is to look at the income the business has generated in the past, and from that data, project the income it is anticipated to earn in the future. This is done by evaluating the tax returns and other financial statements and analyzing what other similar businesses in the area have been earning.
For more information about placing a value on a family business during the divorce process, contact us at Heberger & Company An Accountancy Corporation.