Divorce Practice Areas
Business Valuation for Divorce
A divorce case with a business involved adds a layer of complexity concerning the equitable distribution of marital assets. And with that complexity comes the potential for conflict. So it's best to speak with divorce lawyers near you for expert counsel.
By the way, make sure you read through our Divorce Guidance section. Our family law attorneys compiled a comprehensive review of common issues relating to divorce.
How to Establish Business Valuation
When valuing a business for divorce, experts take different approaches:
- Fair market value
- Fair value
- Book value
- Market value
The fair market value represents the price at which the property changes hands with a willing buyer and seller. It also assumes that neither party is under compulsion to sell. Finally, it assumes that both parties of knowledge of relevant facts. In establishing fair market value, many appraisers apply discounts. For example, they may use a discount for lack of marketability to ensure they obtain appropriate value for any minority interests of other owners.
Although similar, fair value typically forgoes minority interest discounts. The court presiding in the case dictates the fair value. As you might expect, these two standards can lead to radically different business valuations.
Book value reflects the worth of business assets. First, it involves calculating the original cost of assets and subtracting depreciation of those assets based on age. Then, it adjusts the value to reflect any increases. Assets include tangible property like inventory, equipment, and savings accounts. But they also cover intangible items like customers, patents, copyrights, trademarks, software, and the like.
Market valuation examines what an outside buyer would pay for the business. The typical approach involves reviewing income and asset values over the last five years. Next, it looks for income trends. Finally, it forecasts results over the next five years and accounts for any changes.
Moreover, spouses may select a neutral source to value the business and accept that value for marital asset purposes. Conversely, each spouse may elect to go it alone and choose their business valuation. This route ensures the valuation reflects their specific interests and concerns. In particular, with this latter approach, you need a qualified divorce lawyer on hand to protect your interests.
Establishing the Date for Business Valuation
When assessing a business valuation for divorce, you and your divorce lawyer need to identify four specific business values at particular times:
- The business value at the time of your marriage
- Business value if received as a gift
- Business value at the time of separation
- The current value of the business
As of the date of separation, business ownership presents as a marital asset. In Pennsylvania, for example, the divorce court expects a valuation calculation at the separation date. It then asks for another valuation near the date of the divorce trial. The court considers the reasons for significant differences in values to decide which valuation date is fair.
Often, the date of separation value becomes the logical selection for the business valuation, particularly if the court finds the owner purposely depleted business assets since separation. The date of separation also applies if the owner enhances the value due to post-separation efforts.
In cases where the court determines the business grew or declined from market conditions, current value generally becomes the baseline for business valuation. For example, a business buyout could proceed over time, leading to a drastic reduction in business value post-divorce. Your divorce lawyer can address circumstances like these at trial.
In many instances, the basis for business valuation presents controversy. Moreover, it's subject to challenge. That's why it's imperative to select the proper business evaluator. Your divorce attorney can help as they routinely work with these evaluators. Your cooperation with the process supports the business valuation process for a better, faster outcome.
Work with a Divorce Lawyer Near You
As you can see, business valuation can be tumultuous. It starts with selecting the right business valuator. A divorce lawyer can guide you through the process.
Our family law firm has offices in Doylestown, PA, Norristown, PA, and another law office in Cherry Hill, NJ. So, our divorce lawyers are nearby and ready to help with any issues such as business valuation. We can also support you with matters relating to custody, spousal support, and even a PFA order if, unfortunately, necessary. Give us a call today. We're local and ready to help.