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Business Evaluation and Divorce

While small businesses can be subject to division, they can be complex. It is not as easily divisible as other assets like a bank account or a home. Just as the case with a home, one spouse will likely have to “buy out” the other. The difference between a home and a business is the valuation. A home can be valued by a licensed real estate appraiser. A business will need to be properly valued by an appraiser that specializes in business valuation, a CPA, or both. Your attorney will assist you in determining what is right for you.

Depending on the agreement between the couple, the business’ monetary value and the recommendations of your attorney, each side may retain an independent expert to appraise the value of the business or hire a neutral valuator. If each side hires independent experts, it can begin a “battle of the experts.” This is why it is important for you to let your attorney assist you is hiring the right expert for the job. There are three approaches that can be sued to determine the value of a business interest:  the asset approach, the market approach and the income approach.

The asset approach calculates a value based on the accounting principle that assets minus liabilities equals value. Assets considered are both tangible and intangible. Tangible assets are things like inventory, accounts receivables, property, things you can physically see and touch. Intangibles are things like a client-base, reputation; these assets are often referred to as “blue sky.” This approach can be complicated as it is difficult to give an exact value to things like blue sky and inventory. Inventory is valued at cost for a company’s financials, not what the inventory can be sold for.

The market approach is used to determine what the expected price a business would sell for at the time of the appraisal; this is often referred to as an “effective date.” This approach is commonly used to determine the value of a home. The value is calculated by comparing it to similar businesses or “comps” that have been sold. This is sometimes difficult if there are no similar businesses that have recently sold.  In the case of determining how much value a spouse contributed, an additional valuation may be ordered to determine what the business was worth at a previous date. This is called a retrospective appraisal. Having both, a retrospective and current market valuation helps validate how much a business has grown or declined throughout a period of time. Additionally, the two appraisals can help justify dividing a business that was owned prior to the marriage. If marital funds were used to renovate the building, develop a marketing campaign that aided the company growth, used to buy furniture, etc. then at the minimum the marital funds used as well as any additional value it added should be divided equally.

The income approach is the most commonly used approach when valuing businesses. It uses historical information and particular formulas to predict expected cash flow and profits when determining the value of the business. The formulas consider factors such as future benefits and the rate of risk or return. This is the most common approach used.

All valuations are considered a hypothetical situation, unless the business is in fact being sold. An appraisal of any kind is an educated guess and referred to as “opinion of value.” Even though this is considered to be an educated guess, it is of the utmost importance to hire a reputable appraiser that specializes in small business valuations because the economic outcome is determined for both parties.

To ensure you receive your fair share of marital assets, you need a strong legal expert. Call Kevin Hickey Law Partners today to ensure you receive the assets entitled to you. We can assist you hiring the right valuation expert as well as throughout the entire divorce process.