Business Valuation in Divorce
When do you Need a Business Valuation?
If you or your spouse own a business, even a business that was started before the marriage could be a marital property that will be divided as part of your divorce. In many states, the judge must be able to value the business before the judge can determine how the business will be distributed between the parties. A business valuation expert may be needed to testify to the value of the business and any active or passive changes in the value of the business since you separated from your spouse.
Business Valuation Methods
- Market Value
- Discounted Cash Flow
- Market Capitalization
- Stream of Revenue
- Book Value
Market Capitalization is perhaps the simplest method of valuation but it leaves a lot to be desired. It is calculated by multiplying the company’s share price by the total number of outstanding shares.
Stream of Revenue
The Stream of Revenue or Multiple of Revenue method calculates the business’ value by using the revenue generated over a period of time applied to a multiplier depending on the industry and the economy. Some financial experts say this method of valuing a business is not reliable as it only considers revenue. Divestopedia explains that the multiple of revenue is equal to the selling price of a company divided by 12 months’ revenue of the company. The appropriate multiple to apply to a company is obtained by comparing other companies. The revenue multiple is commonly used in valuing:
- Start-up companies that are not profitable.
- Professional service firms such as legal, medical, or accounting firms.
Asset Based valuation totals up all of the assets in the business. A going concern approach lists the business assets minus any liabilities. The liquidation approach determines the cash that would be available if all of the assets were sold and all of the liabilities were paid.
The market value approach uses the recent sale of similar businesses that are comparable to yours to determine the value of your business. This method only works when there is a sufficient number of businesses similar to yours that have sold.
Valuing sole proprietorships and small firms is difficult. Customer loyalty, “goodwill”, and branding may be tied directly to the owner of the business. It’s difficult to determine how much of the value would be lost if the business changed ownership. In small firms, partners may be doing jobs other than their own, such as running payroll, marketing, or sales.
Is a Business Marital Property?
A business that was started after the date of your marriage and prior to the date of separation, it is very likely marital property. Some exceptions may apply if the business was inherited or if you used separate property to start the business. A business valuation is critical to divide up this marital asset equitably between the spouses.
Often one spouse already has a small (or big) business prior to the date of marriage. In that case, the business would be technically classified as separate property of that spouse and as such the other spouse would not be eligible for any share in the business. However, if during the course of the marriage, the business has increased in value and become more profitable due to the active efforts of the owner spouse, the increase in value is classified as marital property and subject to distribution. In such a scenario, which is most common, valuing the business becomes necessary.
Business valuation in divorce can be highly tricky, involving highly technical legalities. We at McIlveen Family Law Firm have considerable experiencing in working with experts in valuing businesses for the purpose of divorce. We work with some of the best valuation professionals to arrive at the correct value of the business and ensure that your rights with respect to marital assets and property are always protected.