How Are Family Businesses Valuated During a Divorce?
Asset division is, for many couples, the most challenging part of getting divorced. If you have a family business–particularly one you have built together, or which you have both worked in over the years–you may find yourselves struggling with how to divide this critical asset.
How are family businesses valuated in the divorce, and how can it impact the overall division of assets–not to mention who might end up with the family business, or what it’s worth compared to other assets you might have to divide? Take a look at these three key strategies.
The Asset Approach to Valuation
The asset approach to valuation considers the business one of the couple’s assets. As such, it will need to be assigned an asset value based on its net worth. In order to use the asset approach, a lawyer will ask several critical questions.
- What assets does the business have? Some assets, like vehicles that belong to the company or computer equipment, may prove relatively easy to assign a specific value. Other assets, however, can prove more problematic. How much is the inventory actually worth? What about items like office equipment? Intangible assets like intellectual property? You may want to have an independent audit of the business to give a better idea of its net worth.
- What debts or liabilities does the business have? If the business has debt, or liabilities that it must pay, those numbers are subtracted from the asset value of the business.
The asset approach can be a very effective way to assign a tangible value to the business, especially if you aren’t sure what the business is actually worth or how its worth compares to other assets that you and your former spouse need to divide.
Valuing a Business By Income Potential
Your family business represents more value to you and your spouse than just the total of its parts–the pieces that you can break down into specific assets. It also represents a source of income–in some cases, your primary source of income over the past several years. The income valuation method is the one most commonly used to establish the value of a business when you’re dividing assets during a divorce, since many people are more concerned about the potential income from a business than they are about its current assets.
In order to determine the income value of a business, you and your spouse will have to take a look at its past earnings in order to evaluate its future earning potential. You will look at:
- Cash flow. How does cash flow through the business each year? What expenses does it have? Do you have large operating costs that could impact the overall value of the business?
- Profits. What profit does the business see: the amount actually brought in once all payments have been made? The profit amount is the income potential of the business.
- What are the business’s past profit levels, and how have they changed over time? Do you see seasonal variations? Significant variations from year to year? If so, those factors might impact your approach.
You may choose to look back over the past potential of the business. Keep in mind that you may not have the potential to fully evaluate the future earning potential of the business, but you can get a better idea of its projected profits for the future based on its past earnings. Some spouses will try to fight for continued spousal support in the form of payments through the business, while others may prefer to seek a one-time payout. Which one you choose to pursue may depend on the actual income potential of the business as well as the assets you and your spouse share at the time of divorce.
Valuing Family Businesses According to Market Value
If you were to sell your family business today, how much would it be worth? That is the key question that you’ll need to answer when valuing your business according to the market value approach. The market value approach looks at similar businesses that have sold recently and compares them to your family business in order to arrive at a reasonable market value.
The market value approach will ask questions like:
- What approximate assets and income does your business have? This assessment may require a look into all the assets your business carries, or it may be a vaguer look based on your business’s overall size and general asset value.
- How does your business compare to other businesses that may have sold recently? Ideally, you would like to find a business, or several businesses, that have several facets in common with your family business, including general industry and size.
- What did those businesses sell for?
Market valuation is the least common method used to value family businesses in a divorce due to the difficulty in finding a business that is exactly like yours. You may find that market valuation makes the process more contentious, since it makes it harder to arrive at an agreement regarding the actual value of the business–and may not actually represent the earning potential or actual assets that your business has. However, it can offer an accurate view of what your business is worth–and may be helpful if you are, for example, comparing two businesses.
Dividing assets during a divorce is a challenge. Dividing assets like businesses can make it even more difficult, especially if you and your spouse cannot easily negotiate and arrive at an agreement. By clearly determining how you will value the family business ahead of time, you can often make it easier to arrive at an agreement that works for everyone.
Working with a lawyer can help you learn more about your legal rights during a divorce and give you a better idea of what assets you should ask for–including how the presence of a family business can impact your asset division. Do you need legal help dividing your assets? Betsy A. Fischer is here to help. Contact our office today at 504-780-8232 to schedule a consultation.