Business Valuation in Divorce | 9 FAQs You Must Know

In this article, we’ll answer the most important questions we get when helping clients navigate business valuations during their divorce.

Click the links below to jump ahead to questions you have:

Q1. Do I Need a Professional Appraisal For My Business?

Q2. Who Conducts Business Valuations for Divorces? And Who Hires Them?

Q3. How Business Valuations in Divorce Work: Is The Process Fair?

Q4. What Factors Determine the Value of My Business?

Q5. What Common Issues Should I Expect to Encounter?

Q6. How Can I Avoid Things Getting Messy? Navigating Divorce Business Valuations Properly

Q7. What Methods Are Used for Divorce Business Valuations?

Q8. What Key Terms Do You Need to Learn? A Quick Valuation Glossary

Q9. How is a Business Valuation in Divorce Different to a Business Valuation for Other Purposes (Mergers & Acquisitions, etc.)?

How Division of Business Assets Works in Divorces – Overview

When a married couple initiates divorce, everything they own in that marriage needs to be divided between them. This includes businesses owned by one or both parties. 

Why? Because a business isn’t just a source of income; it’s an asset, much like a house or car. 

However, unlike houses or cars, businesses require professional assessment to determine their fair market value. This value then informs the equitable distribution of assets between spouses.

A professional appraisal is necessary when:

  • The business’s value is significant.
  • The business structure is complex.
  • There’s a dispute over the business’s worth.

To reduce the likelihood of disputes later on, both parties should agree on the terms of the valuation, including choosing a neutral, professional appraiser like Eton. Our team of experts specialize in conducting valuations for businesses owned by you or your partner in the case of a divorce.

Business valuation also comes with unique complexities you don’t see with other assets, including:

  • Earnings and Cash Flow Analysis: Unlike simple assets, a business’s value is often tied to its ability to generate future earnings and cash flow. Valuators must carefully analyze financial records, market conditions, and projections to determine a fair value.
  • Intangible Assets: Businesses often have intangible assets like brand reputation, patents, trademarks, and customer relationships that can be challenging to quantify but significantly affect the overall value.
  • Market Conditions: The value of a business can fluctuate based on market demand, competition, and industry trends. Valuators need to consider these external factors when determining value.
  • Ownership Structure: The complexity of a business’s ownership structure, including any partnerships or shareholder agreements, can impact valuation.
  • Tax Implications: Business valuations must account for potential tax liabilities or benefits, which can alter the net value of the business.
  • Legal Considerations: Agreements, contracts, and legal disputes can all influence a business’s value and must be carefully evaluated during the valuation process.
  • Personal Goodwill vs. Enterprise Goodwill: Distinguishing between the value that stems from an individual’s personal reputation and skills versus the inherent value of the business itself can be complex. But this is essential for fair valuation.

To understand how business valuations work in a divorce, let’s look at an example: 

An Example: Alex and Jordan’s Small Business Bakery

Let’s consider a hypothetical example involving a married couple, Alex and Jordan. 

Alex owns a successful bakery called “Alex’s Sweet Spot”, which she started five years ago. Jordan pursues a separate career, uninvolved in bakery operations. 

During their divorce, the assets need to be divided, including the bakery. 

Even though Alex is the sole owner of the bakery, it is deemed a marital asset since the business flourished during their marriage. Therefore, its value must be assessed for equitable division. 

Step 1: Valuation

Alex and Jordan hire a professional appraiser, like Eton Venture Services, to evaluate the value of  “Alex’s Sweet Spot.” 

The appraiser examines the bakery’s financial records, including income, expenses, assets (like kitchen equipment and the lease agreement), and liabilities. They also consider the bakery’s market position, brand value, and growth potential.

Step 2: Determining the Value

After thorough analysis, the appraiser determines that the bakery is worth $300,000.

This valuation considers not just the physical assets and current finances but also intangible elements like the bakery’s reputation and customer loyalty.

Step 3: Division

With the value established, the next step is to decide how to divide this asset. Since Jordan has not been involved in the bakery, a direct involvement in the business post-divorce may not be feasible or desired. 

Instead, the couple might agree that Alex will keep the business, compensating Jordan for their share of its value.

Possible Outcomes:

  1. Buyout: Alex might agree to pay Jordan $150,000, representing Jordan’s 50% share of the business’s value. They can do this either in a lump sum or through a structured settlement.
  2. Asset Swap: Alternatively, if there are other assets of equivalent value, Alex might keep the bakery, and Jordan could receive assets like real estate or investments totaling their share.

If Jordan had been a co-owner of the bakery, the outcomes may look a little different. A buyout is still possible, but they may instead choose to:

  • Sell the Business: After the sale, the proceeds are divided according to their ownership shares or as agreed in the divorce settlement.
  • Stay Co-Owners: In some cases, the couple will want to remain co-owners. They will need to decide on structured roles and responsibilities and ensure clear operational boundaries. 

We hope this example helped understand how business valuations work in divorces.

But do you need to hire a professional appraisal for this? Or can you do it yourself? We explain more in the next section.

Q1. Do I Need a Professional Appraisal For My Business?

Yes, in most divorce cases involving a business, a professional divorce appraisal is necessary to ensure an accurate and fair valuation. 

This is especially crucial if the business represents a significant portion of the marital assets or if its value is contested by either party. 

A professional appraisal provides an unbiased estimate of the business’s worth, considering factors like earnings, market position, and future potential. Using them can help keep the divorce amicable.

In need of a Qualified and Experienced Business Valuator? Eton can help.

We have CFA-credentialed experts with Big 4 training, all of whom can deliver defensible and accurate valuations that align to your state’s laws. Get in touch with us here to discuss your business valuation needs.

When a Professional Appraisal Isn’t Needed:

A formal appraisal might not be needed under four conditions:

  1. If the business is very small with minimal assets
  2. If both parties can agree on its value
  3. If the business is not a marital asset  (meaning it was acquired before the marriage or through inheritance)
  4. If its value is not contested

Q2. Who Conducts Business Valuations for Divorces?

Business valuations for divorces are conducted by professional appraisers or valuation experts who specialize in understanding a business’s financial worth.

These professionals can come from various backgrounds, including:

  • certified public accountants (CPAs) with accreditation in business valuation
  • certified valuation analysts (CVAs)
  • or certified financial analysts (CFAs) with experience in appraising businesses

Eton falls into the last category. Our team is full of CFA-credentialed experts who have years of experience valuing businesses across industries.

And Who Hires Them?

The type of people who hire professional valuators can vary depending on the divorce proceedings. In some cases, both parties agree to jointly hire a single neutral appraiser to ensure the valuation process is impartial and fair. 

This approach can save money and time, and helps in facilitating negotiations. 

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.

Q3. How Business Valuations in Divorce Work: Is The Process Fair?

The process of business valuations in divorce aims to be as fair as possible to both parties, ensuring an equitable division of assets. 

Here’s the process and how fairness is maintained throughout:

Selection of a Valuator: 

Often, both parties agree on a neutral, third-party professional to conduct the valuation. This ensures the process starts on impartial grounds. If disagreements arise, a court may appoint an expert.

Standard Methods and Approaches:

Valuators use established, recognized methods for business valuation, such as the income approach, market approach, and asset approach. These methodologies provide a structured, consistent framework for valuation, contributing to fairness.

Comprehensive Analysis: 

The valuator conducts a thorough analysis of the business, considering all relevant factors like financial performance, market position, and intangible assets. This in-depth approach ensures that the valuation captures the business’s true worth.

Opportunity for Review: 

After the valuation is completed, both parties (and their legal representatives) have the chance to review and question the findings. If there are disputes, they can be addressed through negotiation or mediation.

Adjustments for Fairness: 

In some cases, adjustments may be made to account for non-economic factors, such as one spouse’s significant non-financial contributions to the business. These adjustments aim to ensure the division reflects both parties’ inputs into the business’s success.

Q4. What Factors Determine the Value of My Business?

Several key factors determine the value of a business:

  • Financial Performance: Historical earnings, revenue trends, profit margins, and cash flow are critical indicators of a business’s health and potential for future profitability.
  • Assets and Liabilities: The value of tangible assets (like property, equipment) and intangible assets (such as brand value, patents) minus liabilities contribute to the business’s overall value.
  • Market Conditions: The demand for the type of business in the market, competition, and overall economic conditions can significantly impact value.
  • Growth Potential: The business’s ability to grow its revenue and profits, expand into new markets, or develop new products plays a crucial role in its valuation.
  • Industry Trends: Trends and changes within the industry can affect the business’s future prospects and, therefore, its value.
  • Ownership Structure: The complexity and type of ownership structure can influence the valuation, especially if there are agreements affecting control or sale.

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 influence the value of their business. 

That’s because they confuse the hard work and time invested in the business as contributing to its fair market value. But fair market value is always based on tangible information such as financial performance, and market conditions.

Q5. What Common Issues Should I Expect to Encounter?

When navigating business valuations in a divorce, you might encounter:

Differing Valuations

It’s common for spouses to have different opinions on the value of a business. Engaging a neutral, third-party appraiser can help establish a fair market value, providing a basis for agreement.

Double Dipping

This issue arises when the same income stream is used for both valuation and support payments. It’s crucial to structure settlements carefully to avoid unfair financial advantages to one party.

Hidden Assets

Sometimes, a spouse may not fully disclose business assets. Hiring a forensic accountant can uncover inaccuracies and ensure a transparent valuation process.

Emotional Attachments

Emotional ties to a business can complicate negotiations. Focusing on objective criteria and seeking mediation can help in reaching an equitable agreement.

Joint Business Involvement Post-Divorce

When both parties wish to remain involved in the business post-divorce, it’s crucial to clearly define roles and responsibilities to prevent conflicts. 

Establishing a formal agreement that outlines each party’s involvement, decision-making power, and financial entitlements can help maintain a productive working relationship and protect the business’s interests.

Q6. How Can I Avoid Things Getting Messy? Navigating Divorce Business Valuations Properly

Nobody wants a long drawn out messy divorce. It’s emotionally draining, costly, and can create lasting problems between the divorced couple. This is something you want to avoid, especially if there are children involved. To keep things amicable and the process as clean and simple as possible, we recommend using the three methods outlined in the next section. 

Q7. What Methods Are Used for Divorce Business Valuations?

For divorce business valuations, three primary methods are commonly used:

  • Income Approach: Estimates future income to determine current value.
  • Market Approach: Compares the business to similar businesses that have been sold.
  • Asset Approach: Calculates the value based on the business’s total assets minus its liabilities.

Each method offers a different perspective, and the choice depends on the business’s nature, financials, and the specific circumstances of the divorce.

Some states mandate specific valuation methods like the fair market value approach, while others allow flexibility based on expert recommendations and case specifics.

You should hire a Business Valuation Firm who is familiar with state requirements and will guarantee the correct method is always applied.

Q8. What Key Terms Do You Need to Learn? A Quick Valuation Glossary

Fair Market Value: The price at which the business would sell under normal conditions.

Asset Approach: Valuation method based on business assets and liabilities.

Income Approach: Focuses on future earnings potential to value the business.

Market Approach: Compares the business to similar ones that have sold.

Goodwill: The value of a business beyond its tangible assets, often related to reputation or customer relationships.

Marital Property: Assets acquired during the marriage, subject to division.

Equitable Distribution States: States where assets are divided fairly but not necessarily equally.

Community Property States: States where marital property is split 50/50 between spouses.

Q9. How is a Business Valuation in Divorce Different to a Business Valuation for Other Purposes (Mergers & Acquisitions, etc.)?

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 ComplianceM&ADivorce
PurposeCalculate or reduce tax liabilityMaximize deal valueEquitable asset division
ApproachOften conservative, prioritizing IRS regulationsFocuses on future potential and market comparablesConsiders fair market value, but adjustments like discounts might apply
MethodsMay use IRS-preferred methods (e.g., asset-based)More diverse methods used (e.g., discounted cash flow, market multiples)State laws influence preferred methods and adjustments
FlexibilityLess leeway, aiming for complianceNegotiated between parties, seeking the best offerMay involve expert recommendations and adjustments based on specific circumstances
ComplexityCan be complex, but typically standardizedHighly complex, considering synergies, future earnings, and market trendsComplexity varies depending on business size, state laws, and potential disputes

If you’d like a professional to evaluate your business, our CFA-credentialed experts can help. We offer accurate, defensible, and objective valuations that align with your state’s laws in a timely manner and at a reasonable cost. 

Please reach out to us below.

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President & CEO

Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.

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