How Does Business Valuation Factor in Divorce Cases and Equitable Distribution?

Dominic Kirui, Sr. Business Valuation Analyst

Divorce is often an emotionally and financially complex process. When one or both spouses own a business, the stakes become even higher. In such cases, business valuation plays a critical role in ensuring a fair and equitable distribution of marital assets.

Understanding Equitable Distribution

Equitable distribution is a legal framework used in most states to divide marital property during a divorce. Unlike community property states, which mandate a 50/50 split, equitable distribution aims for fairness, which may not always mean equality. The value of the marital estate—including any business interests—must be accurately determined to achieve a just outcome.

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The Role of Business Valuation

When a business is part of the marital estate, its valuation becomes essential. Business valuation is the process of determining the economic value of a business or ownership interest. Professionals use various approaches, such as income, market, or asset-based methods, depending on the nature of the business and available data.

Here are three ways business valuation factors into divorce cases:

1. Determining Marital vs. Separate Property

   • One of the first steps is to determine whether the business is a marital asset. If the business was started or significantly grew during the marriage, its value might be considered marital property. Pre-existing businesses or portions thereof may be considered separate property unless commingled.

2. Establishing Fair Market Value

   • Fair market value is the cornerstone of equitable distribution. Valuation experts consider various factors, including revenue, profits, industry trends, and the business's goodwill. This comprehensive evaluation ensures that both spouses have a clear picture of what the business is worth.

3. Facilitating Settlement Options

   • Once the business’s value is established, spouses and their advisors can explore settlement options. These may include a buyout by one spouse, selling the business and splitting proceeds, or awarding the business to one spouse while compensating the other with additional assets.

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     Exploring settlement options for equitable distributions

     
     

Challenges in Valuing a Business

Valuing a business during divorce presents unique challenges. These include:

• Goodwill: Separating personal goodwill (linked to the owner's reputation) from enterprise goodwill (linked to the business itself) can significantly impact valuation.

• Income Disputes: If a business owner manipulates income or expenses to affect valuation, it complicates the process. Forensic accounting may be necessary to uncover the true financial picture.

• Market Volatility: Economic conditions and industry trends can influence a business's value. Timing the valuation accurately is critical.

Choosing the Right Valuation Expert

Engaging a qualified business valuation expert is essential to navigating these complexities. Professionals with credentials such as Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), or Business Certified Appraiser (BCA) bring credibility and expertise to the process. They can provide objective, defensible valuations that stand up in court if needed.

Bringing objectivity, compassion, and reason to decision-making

Conclusion

Business valuation is a pivotal component of divorce cases involving business ownership. It ensures transparency and fairness in the equitable distribution process, helping both parties move forward with clarity and confidence. Professional advisors and business owners involved in divorce cases should seek expert guidance to protect their financial interests and achieve a balanced resolution.

Reach out to us at Brite Capital Consulting, Inc. to discuss how we can assist you in cases where equitable distributions play a role, such as divorce, or dissenting shareholders. You can reach us at 828-355-1170.