Valuation of Businesses

A typical scenario which some clients have concerns about is their “share” of a business which they helped their spouse build during the marriage. A client will come in and tell us that they provided tangible and non-tangible support to their spouse while they built a business and now that they are getting divorced, they are interested in how much of the business they are entitled.

The first step is to determine the value of the business. Generally, the business is valued as of the date of the commencement of the action, though there are some courts which will use the date of trial. One would think that the Court of Appeals would have rendered a decision as to which date should be used when valuating the business. One would be wrong. Regardless of the date used, valuation is a complicated matter normally requiring independent experts. While there are many different approaches to valuating a business, most trial courts favor the comprehensive approach recommended by the Internal Revenue Service. This approach uses eight factors to determine the value of the business. The factors are: (1) the nature of the business and the history of the enterprise from its inception; (2) the economic outlook in general and the condition and outlook of the specific industry in particular; (3) the book value of the stock and the financial condition of the business; (4) the earning capacity of the company; (5) the dividend-paying capacity; (6) whether or not the business has good-will or other intangible value; (7) sales of the stock and the size of the block of stock to be valued; and (8) the market price of the stocks of corporation engaged in the same or similar line of business having their stocks actively traded in a free an open market.

The valuation is the easy part! Once the valuation is complete, the Court must fashion an equitable way in which to distribute the business. In fashioning an award, the Court will try to avoid a liquidation of the business or making the estranged spouse a partner of the business. Typically, if there are sufficient non-marital assets, the Courts will offset the business interests and other marital assets. For example, if the Court determines that a spouse is entitled to $50,000.00 as that spouse’s fair share of the business, and there is $50,000.00 of marital property, there is a natural offset (it is never that simple!).

LEARNING POINT: Valuating a business with respect to equitable distribution is a complicated process which even the Court of Appeals hasn’t fully addressed. Experts will be needed and various factors will be analyzed, to include the business owners statement of net worth. If the spouse in question is only a partner of a business, the valuation becomes even trickery. Contact us for a free consultation to discuss this and other equitable distribution questions.

valuation of business

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