When a marriage ends, dividing assets is rarely simple, and it becomes even more complex when one or both spouses own a business.
Many business owners are surprised to learn that even if they started the company themselves, or their spouse was never involved, the business may still need to be valued and divided as part of the marital settlement. Getting that valuation wrong can affect everything from buyout terms to how long the process drags on.
If you’re trying to understand how a business is valued in a divorce, whether you need a professional appraisal, and how to avoid unnecessary disputes and escalations, this guide walks you through the process.
We cover the valuation methods used in divorce, what determines the value of a business, the common issues that can complicate the valuation, and when it makes sense to bring in a professional appraiser.
Dividing a business in divorce is more complicated than simply assigning an asset to one spouse or the other. A formal business valuation is needed to establish what the business is worth, providing a basis for asset division, a buyout, or settlement negotiations.
That’s because valuing a business for divorce requires several layers of financial, legal, and market analysis, with specialized expertise needed to address factors including:
At Eton, we handle all of these moving parts as part of a single, independent valuation process. Our team of Big Four-trained valuation professionals has completed over 10,000 valuations, including complex divorce business valuations that hold up under legal scrutiny and help prevent disputes before they escalate.
If you need a defensible business valuation for divorce, our experts can guide you through the process. Reach out to speak with our team.
To help you understand the process in more depth, let’s look at an example:
Let’s consider a hypothetical example involving a married couple, Alex and Jordan.
During their marriage, Alex started a successful bakery called “Alex’s Sweet Spot.” Jordan pursues a separate career and is not involved in the bakery’s operations.
During their divorce, the bakery is considered part of the marital estate and needs to be valued before the couple can determine how its value should be divided. The exact division will depend on applicable state law and the circumstances of the divorce.
Alex and Jordan hire a professional appraiser, like Eton Venture Services, to determine the value of “Alex’s Sweet Spot.”
The appraiser examines the bakery’s financial records, including its income, expenses, assets, and liabilities. They also consider factors such as the bakery’s market position, brand value, customer relationships, and growth potential.
After completing the analysis, the appraiser determines that the bakery is worth $300,000. This valuation considers not only the bakery’s physical assets and financial performance, but also intangible assets such as its reputation and customer relationships.
With the value established, the next step is to determine how the bakery’s value will be accounted for in the divorce. The exact division depends on state law and the couple’s circumstances.
For simplicity, assume Alex and Jordan agree to divide the bakery’s $300,000 marital value equally. Since Jordan has not been involved in the bakery, continuing to own and operate the business together may not be practical or desirable.
Possible outcomes include:
If Jordan had also been a co-owner of the bakery, other outcomes could be considered. A buyout would still be possible, but they might instead choose to:
Before any of these outcomes can be considered, the business needs a supportable value. Establishing that value is the foundation of the entire process and requires the appraiser to determine which valuation approach best reflects the economics of the business.
In divorce valuations, that means applying one or more of three approaches: income, market, and asset. Let’s look at how each one works:
As said, the three established valuation approaches for valuing a business for divorce are the income, market, and asset approach.
Each measures value differently. One looks at the business’s earning power, another at evidence from comparable businesses, and the third at the value of the underlying assets and liabilities.
The most appropriate depends on the business’s structure, financial profile, and the information available. In many cases, we will consider more than one approach before reaching the most supportable conclusion.
With the income approach, we determine value based on the future economic benefits the business is expected to generate.
We first analyze the company’s historical results and make adjustments where necessary to get a clear picture of its ongoing earning power. That can include normalizing owner compensation, removing personal expenses, and adjusting other unusual or non-recurring items.
We can then use methods such as a discounted cash flow (DCF) analysis, where we forecast the company’s future cash flows and discount them back to today. The discount rate reflects the risk associated with receiving those cash flows. For businesses with stable, predictable earnings, we may instead capitalize a representative level of earnings.
We typically use the income approach when valuing profitable operating businesses with a supportable earnings history. The more reliable the company’s financial information and expected future performance, the stronger the basis for an income-based valuation.
The market approach values a business by comparing it with similar companies or business transactions.
We analyze comparable companies or completed transactions to identify relevant valuation multiples. Those might include a multiple of revenue, EBITDA, or another financial measure.
We then determine which multiples are appropriate for the business we are valuing, adjust them for differences in size, growth, and risk, and apply them to its relevant financial metrics.
We use the market approach when there is enough reliable data on similar businesses.
The comparisons need to make sense. Two companies can operate in the same industry but have very different revenue, profits, growth, locations, or customer bases. We consider those differences when deciding which comparables are useful.
The asset approach determines value based on the company’s assets minus its liabilities.
We review the assets and liabilities on the company’s balance sheet and adjust them where necessary to reflect their value as of the valuation date. This is important because accounting values do not always reflect what an asset is actually worth.
Once those adjustments are made, we subtract the company’s liabilities from its assets to determine its adjusted net asset value.
We use the asset approach when the company’s underlying assets are a more meaningful indicator of value than its earnings. This is often the case for holding companies and asset-intensive businesses with significant real estate, equipment, or investments.
It may also be appropriate when historical earnings are limited or inconsistent, making an income-based approach less reliable.
Here’s how the three approaches compare at a glance:
Approach | What it looks at | Best suited for |
Income Approach | The earnings or cash flows the business is expected to generate, converted into a present-day value. | Profitable operating businesses with reliable financials and a supportable earnings history. |
Market Approach | Valuation multiples from comparable companies or transactions, adjusted for relevant differences. | Businesses where reliable data on sufficiently comparable companies or transactions is available. |
Asset Approach | The value of the company’s underlying assets minus its liabilities, adjusted to reflect their value as of the valuation date. | Asset-intensive businesses, holding companies, or businesses with limited or inconsistent earnings. |
Whichever approach we use, business valuation is not simply a matter of plugging numbers into a formula. There is both art and science involved. The methods provide the framework, but reaching a supportable value requires professional judgment about the assumptions, inputs, and adjustments that go into them.
That means looking closely at the factors that actually drive the value of the business, which we cover next.
Several key factors determine the value of a business:
Many business owners are surprised to learn that sweat equity, the non-monetary investment individuals contribute to a project or business, often in the form of labor, effort, or creativity, doesn’t add value on its own. That’s because they confuse the hard work and time invested in the business as contributing to its value.
In reality, a business’s value is based on supportable financial and economic factors, including performance, market conditions, and identifiable intangible value, rather than the amount of time or effort an owner personally invested.
Business valuations for divorce often involve issues that don’t arise in valuations performed for other purposes. The financials may need significant adjustments, some of the business’s value may be tied personally to one spouse, and the date used for the valuation can affect the result.
Here are some of the most common issues we encounter:
In a divorce valuation, we may need to separate enterprise goodwill, which belongs to the business, from personal goodwill, which comes from the owner’s reputation, skills, or client relationships.
This can have a major impact on the valuation because, depending on state law, personal goodwill may not be included in the marital value of the business. The difference can be especially significant for professional practices, such as medical, dental, legal, or consulting firms, where much of the business depends on one person.
Privately held businesses do not always operate like larger public companies. Owners often have more control over how they pay themselves, which expenses run through the business, how related-party transactions are structured, and when certain income or expenses are recorded.
These decisions may be completely legitimate, but they can mean the company’s financial statements or tax returns do not give us a clear picture of its ongoing earning power.
That’s why we may need to normalize the financials before using them in the valuation. This means making adjustments to show what the business would look like under normal operating conditions.
For example, we may adjust:
In a divorce, we may also need to look more closely for inconsistencies in the financial records. If reported revenue appears unusually low, expenses have changed significantly without a clear explanation, or the tax returns do not line up with financial statements, bank records, or other supporting documents, further analysis may be necessary.
Even relatively small adjustments to normalized earnings can translate into a much larger change in business value once a capitalization rate or valuation multiple is applied.
In some divorce valuations, the challenge is determining whether the financial records provide a complete picture of the business, especially when one spouse controls the business and its finances.
Concerns may include unreported income, inflated expenses, personal expenses paid by the business, related-party transfers, delayed invoicing, or unexplained debts.
In these cases, we may need to look beyond financial statements and tax returns to bank statements, general ledgers, invoices, and other supporting records.
If there are serious concerns about undisclosed assets or income, a forensic accountant may also be needed to trace funds and investigate further.
Double dipping can arise when the same business income is considered both in valuing the business for property division and in calculating spousal or child support.
For example, if a business’s future earnings are used to determine its value, one spouse may already compensate the other for their share of those earnings through the division of the business. Using the same earnings again to calculate support can create an overlap.
Whether double dipping is permitted, or even arises in the first place, depends on state law, how the business was valued, and how the divorce settlement is structured.
A business valuation represents value at a specific point in time. In a divorce, deciding which point in time that is is extremely important.
A business may grow, decline, lose a major customer, take on new debt, or experience other significant changes between separation and the final divorce settlement. A valuation performed at one date could produce a different result from a valuation performed months later.
The applicable valuation date depends on the jurisdiction and circumstances of the divorce. Once that date is established, our analysis considers the information and conditions relevant to the business as of that point in time.
It is possible for two valuation professionals to analyze the same business and reach different conclusions.
Business valuation requires professional judgment. Differences can arise from the valuation approach selected, financial adjustments made, forecasts used, comparable companies chosen, assumptions about risk and growth, or the treatment of goodwill.
When valuations differ materially, the underlying assumptions and calculations need to be examined. A well-supported valuation should clearly explain how the conclusion was reached and provide the evidence behind the key assumptions.
As the issues above make clear, there can be a lot more to valuing a business in divorce than looking at its financial statements. That’s why a professional divorce appraisal is necessary to ensure the value used for asset division is accurate, defensible, and fair to both parties.
This is especially important if the business represents a significant portion of the marital estate, when ownership or income is disputed, or when one spouse plans to keep the business and buy out the other. In these situations, informal estimates or DIY approaches are rarely sufficient.
A professional appraiser can determine the most appropriate valuation methods, make necessary adjustments to the financials, account for issues like goodwill, and support the final value with clear evidence.
Using a neutral third-party valuation firm can also reduce conflict by giving both sides, and the court, if necessary, a common, objective reference point.
In practice, courts and attorneys tend to place far more weight on divorce business valuations prepared by experienced professionals using recognized methods, rather than numbers produced by one spouse alone.
A business valuation for the purpose of a divorce will be handled with slight differences to a business valuation that is conducted for a merger & acquisition (M&A) or for tax compliance.
Below is a table outlining the differences in purpose, approach, methods, flexibility, and complexity for each.
Tax Compliance | M&A | Divorce | |
Purpose | Determine value for tax reporting or compliance | Support transaction pricing and negotiations | Determine business value for division of marital or community property |
Approach | Follows applicable tax rules and valuation standards | Focuses on transaction value, future potential, and market conditions | Uses the standard of value required by the applicable state and circumstances |
Methods | May use income, market, or asset-based methods, depending on the purpose and facts | May use methods such as discounted cash flow and market multiples | May use income, market, or asset-based methods, with state law affecting how they are applied |
Flexibility | Less leeway due to tax and regulatory requirements | Negotiated between parties based on the economics of the deal | May involve expert judgment and adjustments based on state law and case-specific circumstances |
Complexity | Can be complex depending on the tax purpose and business | Can be highly complex, considering synergies, future earnings, and market conditions | Complexity varies based on the business, state law, ownership structure, and potential disputes |
The terms below come up frequently in divorce business valuations and court proceedings, so understanding them can help you follow the process and communicate more confidently with advisors and attorneys.
Divorce business valuations can quickly become contentious without the right expertise and process in place. At Eton, our Big Four–trained, CFA-credentialed valuation professionals have completed over 10,000 independent valuations, including complex divorce matters.
We provide objective, defensible analyses designed to reduce uncertainty, support fair outcomes, and withstand scrutiny from attorneys and courts.
If you’re navigating a divorce involving a business, our team can help you approach valuation with clarity and confidence. Contact us to discuss your situation today.
Business valuations for divorce are typically performed by qualified valuation professionals holding credentials such as ABV, ASA, CVA, CFA, or CPA with business valuation experience.
Beyond credentials, the appraiser should have experience with divorce valuations, understand the applicable state laws and court requirements, apply recognized valuation methods, and be able to clearly support their conclusions if challenged.
At Eton, our CFA-credentialed valuation professionals have experience preparing independent business valuations for complex divorce matters. Our work is independent, methodical, and designed to hold up under scrutiny.
In some cases, both parties agree to jointly hire a single neutral appraiser to ensure the valuation process is impartial and fair. This approach often saves time and cost and can make negotiations more efficient.
Alternatively, each party may hire their own expert to provide a valuation, especially in contentious divorces where there is significant disagreement over the business’s value.
The court can also appoint a valuation expert in certain situations, particularly if there is a dispute over the chosen appraisers or the presented valuations.
Schedule a free consultation meeting to discuss your valuation needs.
