What happens when you divorce your spouse and need to split up a business? Commonly, one spouse will buy out the other spouse — one person will retain the business while the other will get cash for its value. But it can be hard to value a business, especially a small-to-midsized business. How do you determine business valuations in a divorce?
The asset approach is by far the simplest. What are the tangible assets of the company? This includes cash accounts, the depreciated value of equipment, furniture, and more. This can also be the case if the business is going to be liquidated. If the business is already suffering, liquidating the business and splitting the assets fairly can be the best and most expedient approach.
What would the company sell for if it was on the market? This can be a little harder to evaluate, but a third-party appraiser can help. Sometimes couples decide to sell the business rather than liquidate it and split the proceeds, especially if they needed to work together to keep the business running. The market approach can be a very fair approach, but may not help either recoup what they’ve put into the business.
The income approach takes a look at how much the business actually makes or is projected to make. This can be better for those who are more or less interested in how much they are potentially losing in the future. A business might only have $20,000 of assets but be making $100,000 a year — a valuation based on asses wouldn’t be fair. At the same time, an income-only approach can be faulty because past performance isn’t a guarantee of future performance.
Sometimes, multiple factors might be considered to determine a company’s true valuation. There are professionals whose job it is to fairly value a business — and while it does cost some money to engage them, it’s often for the best long-term. And, of course, there are other things that could impact how much someone gains from a business. If the business predates the marriage, for instance, this will influence the percentage of the business that is split. Further, if one partner contributed significantly more in assets to the business, this could also be considered.
Importantly, a business valuation — as with any other aspect of a divorce — is made easier through a meeting of minds. If both parties during a divorce agree upon a valuation, then that valuation can be considered valid, irrelevant of assets, market, or income. A critical part of resolving divorce is ensuring that both parties are pleased with the outcomes.
Erica Bloom Law
If you’re in the middle of a divorce in California, you need legal representation from a family lawyer who has extensive experience with these cases. At Erica Bloom Law, we can provide you with the legal guidance you need throughout every step of your divorce and/or custody dispute. Contact us today to schedule a free consultation.