Valuing a Business During a Divorce

Valuing a Business During a DivorceEven when both parties agree that it is time to dissolve a marriage, dividing assets in a divorce can be challenging. Valuing assets like real estate, vehicles, and retirement accounts, is fairly straightforward, as they all have a market value. When it comes to valuing a business, however, things can get tricky.
The accurate valuation of a business during a divorce is often complex and requires the counsel of experienced business lawyers.

Understanding the Valuation Process

Whether it is large or small, every business has value. Attempting to value your business yourself can be a losing proposition. Even if you do seek the services of a highly experienced divorce lawyer in PA, it is important to understand how the valuation process works.

Separate vs. Marital Assets

First, the determination of whether a business interest is separate or marital must be made. Generally, if a business was started or acquired during a marriage, it is considered marital property and should be divided equally. If one spouse owned it before marriage or it was created with separate funds, it could be considered separate property, not a marital asset. However, just because the business interest was acquired prior to the date of marriage, it does not mean that the non-owner spouse is not entitled to a portion of it. Each situation is unique, and it is vital to have a knowledgeable attorney to protect your rights and interests.

Ways to Value a Business

There are three approaches that may be used when determining the value of a business interest, including :

Asset approach: This approach calculates a value using a fairly straightforward equation: assets minus liabilities = value.  Both tangible and intangible assets are included in this approach. Tangible assets may include cash, inventory, real property, and other concrete assets. Intangible assets may include trademarks, patents, and other intellectual property, accounts receivable, and other assets. Although this approach may appear straightforward, it can actually be complex, depending on various factors, including the type of inventory and unrecorded assets and liabilities, which can create significant issues.

Market approach: Using this approach, the value of a business is compared to similar businesses that have been sold in the same geographical area, much like appraisers look at comparables in a neighborhood when determining the value of a home. However, profitability can vary greatly from one business to another and this approach can be challenging when no similar businesses have recently been sold.

Income approach: The most common type of approach that is used to determine the value of a business is the income approach. It uses specific formulas and historical information to determine projected cash flow and profits, and also takes into consideration future benefits and the rate of risk or return.

Unless the business is very small, all of these approaches require legal or financial professionals to investigate and analyze the assets, liabilities, history, finances, and myriad aspects of the business to determine its true value. Business succession planning attorneys are often skilled at this task, as they are quite familiar with the various ways that business may be accurately valued.

At Carosella & Associates, our divorce attorneys and business lawyers in West Chester work collaboratively to guide clients through the valuation process and protect their interests.