Valuing Business Assets in Divorce
If you or your spouse own a business, it’s likely worth more than either of you realize, and it’s usually part of the marital estate. Here’s how business valuation actually works in a North Carolina divorce.
A Business Interest Is Usually Marital Property
Under North Carolina’s equitable distribution law, most property acquired during the marriage is subject to division, and that includes an interest in a business, whether it’s a solo practice, a partnership, or a share of a larger company. It doesn’t matter whether only one spouse worked in the business day to day. If the business (or its growth in value) happened during the marriage, it’s typically on the table.
Before a business interest can be divided, it has to be valued, and that’s where things get complicated. A business isn’t like a bank account with a single, obvious number attached to it.
Tangible and Intangible Assets Both Count
A complete business valuation looks at more than just cash in the bank. It accounts for tangible assets like equipment, inventory, and receivables, as well as intangible assets such as trademarks, patents, client relationships, and goodwill, the reputation and earning power the business has built over time.
Tangible assets
- Cash and accounts receivable
- Equipment, inventory, and real property
- Outstanding debts and liabilities
Intangible assets
- Goodwill and brand reputation
- Trademarks, patents, and contracts
- Client and referral relationships
Why Business Valuation Experts Matter
Because valuing a business involves accounting, tax, and industry-specific judgment calls, courts typically rely on a qualified business valuation expert rather than either spouse’s own estimate. An expert will examine financial records, market comparables, and the specific structure of the business to reach a defensible number, one that can hold up if the case goes to trial. Choosing the right expert, and knowing how to challenge the other side’s expert, can make a significant difference in the outcome.
How Experts Value a Business in a Divorce
A business valuation expert, usually a CPA holding a credential such as ABV, CVA or ASA, applies one or more of three accepted approaches and then reconciles them into an opinion of value. The choice of approach depends on the kind of business, and the two spouses’ experts often choose differently, which is why valuations in the same case can be far apart.
Income approach
Values the business on the cash flow it is expected to generate, either by capitalizing a normalized level of earnings or by discounting projected future cash flows to present value. The most common approach for an operating business with a track record. The normalization adjustments, such as adding back an owner’s above-market salary or personal expenses run through the company, are where most disputes arise.
Market approach
Compares the business to sales of similar companies or to multiples of revenue or earnings in the same industry. Reliable when good comparable data exists, such as for medical and dental practices, franchises and other frequently traded business types; weaker for unique businesses.
Asset approach
Values the business as the fair market value of its assets minus its liabilities. Used for holding companies, real estate entities, businesses that are not profitable, and as a floor value. It generally understates the value of a profitable operating business because it ignores goodwill.
Business Valuation Standards
North Carolina courts value marital property at its net fair market value on the date of separation: the price a willing buyer would pay a willing seller, neither under compulsion, both with reasonable knowledge of the facts. That standard raises several recurring issues. Goodwill is divided into enterprise goodwill, which belongs to the business and is marital, and personal goodwill, which attaches to the owner’s individual reputation and skill; North Carolina courts have generally treated both as part of the value of a professional practice, which differs from many other states and makes expert testimony on the point important. Discounts for lack of control and lack of marketability may be applied to minority interests in closely held companies, and their size is frequently contested. Buy-sell agreement values are evidence but not binding on the court. Finally, because the valuation date is the date of separation, changes in the business after separation are divisible property and are valued separately, with active efforts by the owner-spouse treated differently from passive market changes.
The expert’s report becomes the centerpiece of the equitable distribution trial on this asset, and the cross-examination of the opposing expert is often where the case is won. Choosing an expert who has testified in North Carolina district court, and involving that expert early in discovery, is the best protection for a business owner or a non-owner spouse.
When a Business Valuation Is Needed in a Divorce
A judge cannot divide a business fairly without knowing what it is worth, and neither can the spouses in a negotiation. A formal valuation is needed any time a business or professional practice is part of the marital estate, whether it was started during the marriage or brought into it. Even a business that existed before the wedding needs one, because the increase in its value during the marriage can be marital property and the only way to measure that increase is to value the business at two dates.
The valuation date
North Carolina values marital property as of the date of separation, not the date of trial. For a business, that means the expert works from the financial statements, receivables, and market conditions as they stood on the day the spouses separated. Changes in value after separation are divisible property if they are passive, such as market movement, and generally belong to the operating spouse if they result from that spouse’s post-separation work. Because cases often reach trial a year or more after separation, the two dates can produce very different numbers, and which one applies to which portion of the value is frequently contested.
A business that existed before the marriage
The business itself stays the owner’s separate property, but the growth in value during the marriage is treated as marital to the extent it came from the active efforts of either spouse, including the owner’s own work, as opposed to passive market forces. That distinction requires valuing the business at the date of marriage and again at the date of separation, and then attributing the difference. Owners who did not keep records from the date of marriage often have a difficult time proving the starting value, which works against them.
When the experts disagree
Each spouse usually retains their own expert, and it is common for two credentialed appraisers to reach numbers that differ by 30 percent or more, because valuation involves judgment about future earnings, risk, and discounts for lack of marketability or control. The court weighs both opinions and can adopt one, split the difference, or make its own findings. A joint expert agreed to by both sides cuts the cost roughly in half and removes the battle of the experts, and it is worth considering where the parties trust the process even if they disagree about the outcome.
Business Valuation FAQs
Does it matter if my spouse never worked in the business?
No. If the business was started or grew in value during the marriage, it’s generally still part of the marital estate regardless of which spouse ran it day to day.
What if the business existed before we got married?
The value of the business at the time of marriage may be treated as separate property, but any increase in value during the marriage can still be considered marital and subject to division.
Who pays for the valuation expert?
This varies by case and is often negotiated or ordered by the court. In many cases each spouse retains their own expert, though a jointly retained neutral expert is sometimes used to save costs.
Will I have to sell my business or bring in my ex-spouse as a partner?
Rarely. Courts almost always award the business to the spouse who runs it and compensate the other spouse with other marital assets or a distributive award, which is a money payment that can be made over time. Forced sales and co-ownership are last resorts.
What is a distributive award?
A payment from one spouse to the other, in a lump sum or installments, ordered when the marital estate cannot be divided equitably in kind. It is the usual way a business owner keeps the company while the other spouse receives his or her share of its value. Interest and security for the payments can be ordered.
How much does a business valuation cost?
A full valuation of a small closely held business commonly runs from several thousand to tens of thousands of dollars depending on the complexity and whether the expert must testify. Spouses sometimes agree on a single neutral expert to control cost, and the court may allocate the fee between them.
Does the valuation date matter?
Yes. North Carolina values marital property as of the date of separation. Passive changes in value after that date are divisible property; changes that come from the owner’s post-separation efforts generally are not. Because trials often happen a year or more after separation, the date can change the number substantially, and the expert needs the records as of the separation date.
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