A Guide to Business Valuation in Divorce
Many small business owners are shocked to find out that their business could be considered “marital property” in a divorce. As a result, they could end up losing some of the equity in the business, which will go to their spouse—even if he or she never worked an hour for the company.
Another key issue is valuation. Businesses are notoriously difficult to value. There are so many changes day to day that it’s hard to arrive at a firm number that represents a true value. Nonetheless, you will need to value a business properly so that you don’t get cheated out of your fair share of marital property. In this article, our Aiken, SC divorce lawyer provides an overview of business valuation.
Why Business Valuation Matters
South Carolina is an equitable distribution state. Essentially, a judge will divide your marital property fairly based on numerous considerations.
Let’s assume that, in this article, a judge divides your assets by 50/50. As a small business owner, you probably want to keep your business in one piece and leave your marriage with all the equity.
Imagine you and your spouse have the following assets, with their value in parenthesis:
House ($400,000)
Two cars ($60,000)
Retirement accounts ($140,000)
Small business (?)
If your small business is worth $200,000, then all marital property is valued at $800,000. You would get half, or $400,000. So you will leave with your small business ($200,000) and then $200,000 of other marital property.
But what if your business is valued at $600,000? In that case, all marital property is worth $1.2 million. You will leave with only the business and none of the other assets.
As you can see, business valuation makes a big difference. The spouse who runs the business has an incentive to keep the value low so they get more of the other marital assets. By contrast, the spouse who isn’t leaving with the small business is incentivized to have the business valued highly—leaving them with more marital assets. And a judge wants an accurate valuation.
Different Approaches to Valuing a Business
There is no one correct way to value a business. Instead, there are several different methods we can use. Some of the most common include:
Cost or asset-based approach. You value a business by calculating the value of all assets and then deducting business liabilities. What’s left over is the business value. However, this approach doesn’t work well when a business has few assets.
Income approach. You can also value a business by using present or future earnings. There are various risks with this approach, since you might not collect all future income, or market conditions could fluctuate.
Market value. With this approach, you estimate what a hypothetical buyer would be willing to pay for the business if it were for sale on the market. We can look at what comparable businesses have sold for. This approach has weaknesses, too. For example, there might not be any comparable businesses sold in your market recently, so this is little more than a guess.
We Can Help
At Surasky Law, we can find a business valuation expert for your divorce. This is a professional with experience appraising a business's value using different methods. They are usually a CPA or someone with substantial experience in your field.
The valuation expert typically wants to review various documents:
Accounts payable and receivable
Business debts or other liabilities
Bank records
Cash flow
If you own an office building, the expert will probably visit. A valuation expert also needs to assign a value to the intangible aspects of your business, such as its “goodwill.” This is a difficult concept to capture. You can think of goodwill as reputation. For some businesses, goodwill could be substantial and represent the bulk of a business’s value.
In a divorce, each side can hire their own business valuation expert. We can then compare numbers and reach an agreement—or submit the issue to the divorce court, with the judge ultimately deciding how much the business is worth.
Don’t Assume a Business is Marital
It’s sometimes useful for a business owner to fight the claim that any of the business is marital property. Under South Carolina law, you can exit with your nonmarital (separate) property. It doesn’t count against you when dividing up the marital assets. Let us review the facts. If you started the business while single—and if your spouse never worked a day for the company—then we might claim the entire business is your separate property.
A real risk for small business owners in divorce is that they will end up having to “buy out” their spouse’s share of the business. Imagine a judge decides that your business is marital. It also represents most of the marital property you own. In that case, your spouse might get a share of equity. And unless you want your ex making decisions for your business, you’ll need to buy out their share.
In some cases, business owners end up having to sell their business if they don’t have cash to buy out their ex-spouse’s share. It’s a huge headache. We can avoid any problems if we convince a judge the business is entirely your separate property. Let us look at the facts.
Call Our Firm to Discuss Business Valuation and Divorce
Small business owners have unique needs in divorce. You need to protect the value of your business. There are also things like customer lists and proprietary information that you don’t want to be made public. Hire the right Aiken, SC divorce lawyer. We can take steps to protect your company's value throughout the divorce. We might ask a judge to seal certain divorce records, or we can negotiate a divorce settlement agreement, which helps us avoid contested litigation. Call Surasky Law Firm today to speak with our legal team. You worked hard to build a business. Don’t lose it during a divorce by hiring the wrong law firm.
