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5 things to know about business valuation in divorce

If you or your spouse own a business—either solely or with partners—there’s a good chance the value of that business will matter in your divorce. Even if you have a prenup that will keep the business intact, you may need to determine how much its value increased since you got married.

Valuing the business is a key step in any business owner’s divorce. Businesses can be sizable assets, often more valuable than their owners’ homes, vehicles and stock portfolios. And it’s critical that you put the right price tag on the portion of the business that’s rightfully a part of the marital estate.

You and your spouse have competing interests

If you’re the business owner, you most likely want to see a lower, more conservative valuation. This commonly leads to a lower payout during property division. On the other hand, your spouse likely hopes to see a higher valuation, which could lead to a larger settlement.

The result is that it’s common for both parties in these divorces to work with business valuators. You and your spouse may provide the court with two different values. Your property distribution will hinge on the value the court decides to use, so it may be wise for you to explore the valuation process.

The many factors that can influence a business valuation include:

  • The method used. Valuators commonly vary between three different methods for determining the value of a business. These are asset-based, income-based and market value. The method that’s most appropriate for one business may not be appropriate for another, and the use of the wrong method can easily tilt a valuation.
  • The valuation dates. Your valuation will be dated. It reflects a snapshot of your business’s value on that given day. If you and your spouse don’t offer valuations for the same day, you may further complicate the picture. Fluctuations in the stock market or the price of gasoline may impact your bottom line enough to change the business’s value.
  • Percent ownership. You may not have sole ownership of your business. If you have a stake in a partnership or stock in a corporation, you need to check that the valuation accounts for the amount you own.
  • Expert testimony. When you and your spouse bring competing valuations to the court, you’ll need to support your argument. This often means working with an expert who can explain what the number means—and who can do so in a compelling fashion. Not every CPA can offer moving speeches, so you may want to ask your attorney to point you toward compelling experts.
  • Fraud. Fraud is illegal. But just as people commonly take illegal steps to hide their assets in divorce, business owners or their spouses may try to cheat a valuation. This was allegedly the case in a Silicon Valley divorce where the husband sold a business for far less than he had invested in it and much, much less than the wife felt was a fair valuation.

It may be daunting to consider all these factors while you’re struggling through a divorce, but they’re all part of protecting your investment in the business.

Protect your future

The more you have at stake, the more you want to get things right. Divorces that involve business ownership are commonly among the most difficult and contentious. The valuation of the business can change the whole property distribution math on a fundamental level. There’s a greater need to work with an experienced attorney who understands the process of business valuation. You want arguments that hold up in court.