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The Importance of Valuing a Business During a Divorce

February 1, 2019

If the parties to a divorce own a business, or a share in a business, it is a valuable asset to be considered and should be valued.   In cases where only one spouse works in the business he/she may suggest that they both know its’ value because for years they have lived off the business and there is no reason to spend  money hiring experts.     What a business “throws off,” or what the parties have been taking out of the business, however, even if accurate, is only one aspect of its worth– not its true value.   For example a dentist may bring home a certain amount each month; but the dental practice has value  extrinsic to the dentist’s salary.  There is value in the practice  client base, its equipment, its reputation, its’ location, perhaps its’ building—and a certain amount of the value of the business may be based upon the  personal “good will” and reputation of the dentist.

The Business is a Marital Asset and Gets Divided

The party who has built up the business and worked it day in and day out,  may feel that it is his/her business and the other spouse has no entitlement to it.   He/she may resent having to share the business upon divorce.  Unfortunately, the harsh reality is the business is a marital asset, and just like the marital home, bank accounts, and retirement, etc.,  it is  subject to equitable division.   And, unless the business is being sold,  reasonable and fair division is not possible without a proper assessment of its value.

Hiring a Qualified Business Valuation Expert

Each party has the right to hire a Business Valuation Expert.    When considering whom to hire, the qualifications and background of the expert is important.  While an accountant may be able to review the numbers, it is preferable, especially for in-court testimony, that the expert have a recognized national certification as a CVA (certified valuation analyst).

The  business valuation  report should include an in-depth analysis of numerous factors essential to a final conclusion.   Among those factors should be:  the company background and history;  company financial information and analysis (including historical data and future income stream);   a discussion of personal goodwill (if relevant)  and  the method used for the valuation.   The valuation should include a comparative analysis of similarly situated entities both locally and within a market that is relevant.   Oftentimes when each party has hired well-qualified business valuation experts the valuations come back within amounts close to each other–giving the parties greater comfort in the quality of the valuation.

Should You Stay on As a Partner in a Business Post-Divorce?

In some cases  the owner spouse may suggest that rather than  a buy out the other spouse can become a partner in the business.    Or, in the case of a family owned business,  a spouse may be asked simply to stay on.    Assuming that the business entity allows for this, it may seem a reasonable and less costly alternative to division.   If this is something you are considering, be aware that the issues are complex and rife with  potential future complications.   Before agreeing to such an arrangement consider the following:

  •  What will be your stake in the business  going forward;
  •  What will be the business structure;
  •  Will there be a general and a limited partner;
  •  What will be  the rights and responsibilities of each party;
  • What will your partnership share be;
  • Will you have voting rights;
  • How  will business decisions be made;
  • What will happen if you don’t agree with a decision that your spouse makes;
  • Is there a mechanism for breaking  tie votes if the business is just the two of you;
  • What  will it  feel like to have an on-going relationship with an ex-spouse.

For these, and other reasons, we submit that whenever possible it is best to divide the business rather than have financial ties with an ex-spouse.

When there is a business included in the marital estate significant assets can be at stake and complex issues may arise.   You should assemble a good team to help you.  Working with attorneys, and financial advisors well versed in these matters should help to assure your best outcome.  When considering your options  we encourage you to ask questions before engaging your counselors.

Bookspan Family Law, LLC  is happy to assist with this or any other complex divorce or family  matter you may have.  Please call us at 610 565 6200.