When a couple divorces and one or both spouses own business, their interests may become subject to division in divorce. However, before couples can divide business interests that qualify as marital assets, they must determine the business’s value to calculate the value of the share each spouse receives.
Why Is Business Valuation Important in Divorce?
When a spouse’s business interests qualify as a marital asset, the divorce process will require them to divide the value of those interests with their soon-to-be ex. Thus, divorcing couples must determine the value of a spouse’s business to determine the value of the share of the company distributed to the other spouse in divorce. Business valuation can help couples decide how to split the entire marital estate.
How Business Valuation Affects Divorce Settlements
Once couples have settled on a valuation for a spouse’s business, they can negotiate a divorce or property settlement that determines how they will split their marital estate. A spouse with business interests may not want to divide those interests with their ex; the spouse’s business’s governance documents may not permit the spouse to transfer some of their interests. However, by understanding the value of those interests, a divorcing couple can negotiate a settlement that fairly divides the marital estate, allowing a spouse to keep their business interests by compensating the other spouse with other assets in the marital estate.
The Process of Valuing a Business During Divorce
A divorcing couple who needs to divide business ownership interests must determine the company’s value to calculate the value of each spouse’s share of the ownership interest. Usually, spouses must hire knowledgeable business appraisers to offer opinions on the company’s value. Appraisers use various business valuation methods to determine a company’s value. Which method an appraiser uses will depend on the company’s business model, industry, and growth stage. Standard business valuation methods include:
- Book Value Approach – The book value approach calculates a company’s value by totaling the book value of its assets and subtracting the total amount of its liabilities.
- Market Value Approach – The market value approach values a business based on how the market values it. For a company with a liquid market for its stock (such as a publicly traded company), an appraiser may value the company by its market capitalization, calculating value by multiplying the company share price by the number of outstanding shares. For other companies, an appraiser may determine market value by reviewing what similar companies have recently sold for or the valuation imputed in similar companies’ recent financing rounds.
- Income Approach – The income approach in business valuation assigns a value to a company based on the revenues it generates or reasonably will generate in the future. An appraiser may multiply a company’s current revenue or earnings (profits) by a factor based on the company’s industry. Alternatively, an appraiser may project a company’s future earnings over a specific period and then determine the present value of those earnings.
Understanding Marital Property and Business Ownership
Business owners who get divorced may learn that their ownership interests may get divided between themselves and their spouse during property division in divorce. Business ownership interests can qualify as marital property. Marital property includes all assets acquired by spouses during their marriage. However, marital property can also include the growth in value during marriage for assets that a spouse acquired before marriage. Thus, even if a spouse started their business before getting married, the increase in their business’s value during the marriage may become a marital asset, especially if their spouse contributed to the business’s growth by working on the business or foregoing educational or professional opportunities to undertake homemaking or childcare to allow their spouse to focus on growing their business.
New Jersey uses an equitable distribution system for property division in divorce. Under this system, a court must fairly divide marital property between spouses based on various factors such as the duration of the marriage, the financial circumstances and earning capacity of each spouse, and the contribution of each spouse to the marriage. However, evaluating these factors may mean that a court does not divide an asset or the entire marital estate evenly between the spouses.
Contact Our Firm Today for Help with Business Valuation in Divorce
When you own a business, you may have to divide your ownership interests in a divorce. Dividing business assets in divorce can involve complex issues, including determining the business’s value. Call Law Office of Andrew A. Bestafka, Esq. today at (732) 898-2378 or contact us online for a confidential consultation with a divorce attorney to learn more about the importance of business valuation in divorce.