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
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:
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:
To understand how business valuations work in a divorce, let’s look at an example:
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:
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:
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.
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.
A formal appraisal might not be needed under four conditions:
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:
Eton falls into the last category. Our team is full of CFA-credentialed experts who have years of experience valuing businesses across industries.
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.
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:
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.
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.
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.
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.
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.
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 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.
When navigating business valuations in a divorce, you might encounter:
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.
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.
Sometimes, a spouse may not fully disclose business assets. Hiring a forensic accountant can uncover inaccuracies and ensure a transparent valuation process.
Emotional ties to a business can complicate negotiations. Focusing on objective criteria and seeking mediation can help in reaching an equitable agreement.
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.
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.
For divorce business valuations, three primary methods are commonly used:
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.
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.
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 | Calculate or reduce tax liability | Maximize deal value | Equitable asset division |
| Approach | Often conservative, prioritizing IRS regulations | Focuses on future potential and market comparables | Considers fair market value, but adjustments like discounts might apply |
| Methods | May 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 |
| Flexibility | Less leeway, aiming for compliance | Negotiated between parties, seeking the best offer | May involve expert recommendations and adjustments based on specific circumstances |
| Complexity | Can be complex, but typically standardized | Highly complex, considering synergies, future earnings, and market trends | Complexity 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.
Schedule a free consultation meeting to discuss your valuation needs.
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.
