Did you know that roughly 670,000 to 674,000 divorces occur in the United States each year? And in 2023, a third of Americans who have ever been married have also experienced divorce, according to the Pew Research Center.
This fact gives rise to concerns when it comes to couples who have joint ownership of a business. When spouses jointly own a company, or when one spouse owns a business that may be considered marital property, business valuation can be especially important. But how are businesses valued in divorce, especially for high-asset divorces?
Let’s look at how businesses are valued in divorce and what factors can affect the value assigned to a business.
Marital Versus Separate Property Isn’t Always Obvious
A business that is acquired prior to marriage will most often be considered separate property, but the appreciation of the business’ value during the marriage is likely to be an issue of contention rather than one of certainty.
Courts usually consider whether or not the appreciation in value occurred as a result of the proactive involvement of one or both spouses, whether through managing the business or passively through market conditions, which would have appreciated the value of the business even if there had been no marriage.
The Valuation Date Can Change the Number Significantly
Typically, the courts can choose what date will be used for the value of the business, selecting one between the date of separation and the date of trial or the date of the final decree. There is also a possibility that the business had some sudden fluctuations in its profits after the separation.
In such cases, the courts may pay close attention to the legitimacy of those fluctuations.
Goodwill Value Splits Into Two Very Different Categories
Apart from material assets, a company can also have an intangible asset called goodwill. In a divorce, determining how that goodwill should be treated may require distinguishing between enterprise goodwill and personal goodwill.
Enterprise goodwill is generally tied to the business itself rather than to a particular owner. It may include factors such as the company’s reputation, established customer relationships, brand recognition, and operating systems. In many states, enterprise goodwill may be treated as marital property subject to division.
Personal goodwill, on the other hand, is associated with an individual’s reputation, skills, experience, or relationships. Many states do not treat personal goodwill as divisible marital property because its value depends on the continued involvement of that individual. Still, the treatment of both types of goodwill varies by state law.
There Is No Single Formula for Valuing a Business
Forensic accountants and valuers usually rely on many known methodologies instead of using a single formula for all cases because market capitalization, price-to-revenue ratio, earnings multiple, discounted cash flow, book value, and liquidation value are used for various purposes in relation to the nature of the business and the circumstances surrounding each case.
It will not be possible to apply the same methodology in valuing a service business and a manufacturer that has lots of tangible assets, which is why the valuation professional is very important in this case.
Property Division Rules Set the Stage for the Whole Analysis
How a business gets classified and valued still sits within a state’s broader framework for dividing marital property. A Riverside divorce lawyer regularly works through this same community-versus-separate-property analysis for California clients, where assets acquired during the marriage are generally split equally, while property owned before the marriage, or received through inheritance or gift, remains separate unless it’s been commingled with marital funds.
A business interest gets folded into that same framework, just with far more moving pieces to sort through.
Why an Independent Valuation Matters So Much
As business valuations are heavily based on professional opinion, it makes a huge difference to have an independent forensic accountant or valuation expert hired rather than basing calculations solely on the figures provided by the business owning spouse.
An independent valuation may help identify understatement of income, hidden assets and a figure that is more likely to be held in court should the matter end up there.
Treating Business Valuation as Its Own Specialized Process
It’s important to understand that dividing a business during a divorce is quite different from splitting up any other assets such as a home or a retirement fund since a business is an ongoing venture with potential earnings and requires decisions that cannot be determined simply through appraisals.
For both the owner of the business and his or her spouse, it pays to handle this aspect of the divorce separately.
