Divorcing While Self-Employed: the Business Valuation

By Jim Warren

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As you can imagine, we’ve handled just about any conceivable circumstance in more than 35 years helping  clients with divorces in the Charlotte area.  Some of the trickier situations we’ve seen involve self-employed spouses, and how they think they can value their business as an asset during the process of equitable distribution.

Often, the self-employed spouse may try to act like their business isn’t worth all that much, since it’s in their best interest to downplay its asset value. However, It’s important to know your options with regard to valuing a business as part of the dissolution of your marriage, and what the court will consider in helping you reach a fair division of marital property.

Obtaining a Professional Business Valuation

If you’re unable to agree with your spouse on the value of the business, you’ll need to bring in a third party to evaluate this key asset. Business valuation specialists can come from a variety of disciplines and are often accountants or business brokers.  As with your method for evaluating professionals outside of divorce circumstances, you should hire a business appraisal specialist who’s not only experienced in his or her profession, but has also evaluated multiple businesses similar to the one at-hand. Keep in mind as well that this individual may have to testify before the family court judge.

Regardless of the type of professional you employ, you’ll typically do a business valuation when a) you can’t agree with your spouse on the value of the company, and B) it’s a more complex business than a sole proprietorship that doesn’t take in that much money.  To arrive at their valuation, the appraiser will typically look at tax returns, financial statements, books (general ledgers), bank accounts, balance sheets, and any available business plans and marketing materials, as applicable. In addition, they will look at market factors that may drive a current valuation and consult with other professionals and outside resources to make this assessment.

Three Approaches for Valuing a Business

Business appraisers typically use one of three valuation methods: the asset approach, the market approach, and the income approach.

The asset approach follows a simple formula:  assets minus liabilities equals value. Keep in mind that this approach takes into account both tangible assets like equipment and inventory, as well as intangible assets like receivables and intellectual property.  While this approach seems simple on the surface, disputes can arise as to how the appraiser values inventory or a patent portfolio. And since this is a by-the-books evaluation, it may fail to take into consideration unrecorded assets and liabilities, such as a loan from a family member to start the business.

Another key point of consideration: you have to find out the real world value of assets on the books. Often, they are presented by the business owner at depreciated values.

The second type of approach will feel familiar to those of you who have purchased real estate. The market approach, compares the business to similar businesses that have been sold much like a real estate appraiser looks for comparable sales in the same neighborhood, or one close by the property at-hand. For this approach to work well, of course, there must be comparable businesses sold in recent times.

The third type of valuation method, the income approach, combines both historic financial data forecasting models that predict cash flow and profits to drive the value of the business. This method can be especially useful for the court for calculating the real asset value post-divorce. 

Conclusion

During a divorce proceeding, there may be one or more business appraisers involved. Sometimes, the spouses can agree on using a single appraiser; often, we see each spouse hiring their own appraiser, leaving the decision up to the court as to which valuation and method to accept.

Valuing a business within the context of marital property plays an important role in the process of equitable distribution. While the business-owning spouse may try to downplay the value of the business, there are ways to arrive at the fair valuation that will leave the business consideration in the same fair, equitable light as the other marital assets, like real property and bank accounts.

In more than 35 years of practicing divorce and family law here in Charlotte, we have protected the interests of both business owners and spouses trying to arrive at a value that will get them their fair share of the divorce property. Don’t let the added complexity of a business keep you from getting what is rightfully yours in the eyes of the law. Contact us at Warren Family Law today.