How to Value a Small Business for Divorce Proceedings

Divorce proceedings are monsters with multiple heads! It is a very stressful and emotionally difficult situation for both sides. All participants in the process only want to complete all the necessary procedures as quickly as possible. But in addition to psychological discomfort, there are legally and financially difficult moments that sometimes cannot be avoided.

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When initiating a divorce process, often, neither of the spouses is inclined to aggravate the situation. But when it comes to managing divorce in an uncontested form, one of the prerequisites for the legitimacy of such a case is concluding a mutual agreement. Such an agreement implies a settlement between the spouses about any points that could cause disputes or mutual claims in the future.

In addition to the legal plane, joint property division plays an essential role in this matter. Naturally, in addition to movable and immovable property, this includes financial savings, as well as loans, other credits and debts, and shares in any business. Therefore, it is extremely important to pay special attention to the assessment and business valuation for divorce purposes before starting the process and filing for divorce.

Business Division And Distribution Options When Divorcing

When a married couple gets a divorce, and one of the spouses owns a business, that business is often considered an asset owned by the marriage that must be divided. A business can be created and started in different forms of existence: sole proprietorship, business partnership, or corporation. The form of the business can directly affect taxation, ownership, and how it is divided when co-owners of the business get divorced.

The first and most vivid option is to sell the business and divide the profits. The obvious benefits of this option are that both spouses may profit from a sale of the business and can use the proceeds to invest in their own business ventures. In addition, spouses can avoid additional financial relations with their former spouse. The reverse side of the coin in this situation is that this process could take some time. Many businesses can’t be sold easily, and it may be months before a buyer is found.

The second option is also a rather popular variant that can be advantageous for some purposes. The spouses could make a financial deal where one spouse buys out the other spouse’s interest. A buyout may be the best option assuming there are sufficient assets to complete the transaction. This can be accomplished if the buying spouse has enough cash or liquid assets to pay off the selling spouse.

And finally, the third option is to dissolve the business. Dissolving business partnerships is governed by state law, so it is important to check the state’s website for information about the process and forms necessary to be completed. It usually takes 90 days from filing a statement of dissolution to dissolve a partnership. The process ensures that neither partner will be responsible for the other’s debts and liabilities. Once dissolved, neither partner can enter into any binding transaction on behalf of the partnership.

Special Features Of Divorce Business Valuation For Small Businesses

Uncontested divorce cases are the most common divorce case format in the United States today. One of the spouses who is the petitioner or respondent in such a case may be a founder, co-owner, shareholder, or investor in a small business. However, in order for business assets to be adequately assessed, it is important to realize that internal institutional regulations in a small company or start-up may differ from the state of affairs in a large company or corporation.

Experts often evaluate a business based on the market value of all the company’s assets and a general idea of how much it is possible to resell this business to third parties. But when the question “how is a business valued in a divorce” arises, slightly different rules come into play. This happens because a legal basis is always required for a fair and grounded division of shares in the business between the participants in the divorce proceedings.

The simplest scenario for the division of property and shares in a business between former spouses is to transfer the case to the court and directly to bailiffs. But in any case, a qualitative assessment is necessary for both parties to get a profit. In general, there are three main ways in which to complete a business valuation for divorce purposes. These varying approaches focus on aspects such as assets, the market, and income, respectively.

The asset approach uses a formula: assets minus liabilities. At first glance, this may seem to be a relatively simple approach, but it can become complicated. When it comes to placing a value on assets, different people have different approaches to doing these valuations. Items such as vehicles or computers may be relatively easy to place a value on, while other items such as inventory or office equipment may be more challenging.

On the other side, the market approach is the least commonly used of the three variants. It assesses and evaluates other businesses of a similar size that have recently been sold. This approach can be likened to how houses in a neighborhood are evaluated. In the event that there are no such similar businesses that have been evaluated and sold, this approach may not be suitable, and the spouses will need to consider the other two methods for valuation purposes. The reality is that in many cases, it is very difficult to find other comparisons that closely mirror that of the company to be valued.

The income approach focuses on the revenue of a business and uses past performance to predict its future income. This valuation method focuses predominantly on projected cash flow and profits. Of the three approaches, this is the most commonly used when it comes to valuing a business for the purpose of divorce. Income is generally defined as the total value of proceeds from all goods and services sold by a business. This income includes any investment-related proceeds.

Saving A Business After Divorce

The situation with property and business division and further distribution can become a dead deal for the small business itself. This may happen if both spouses, as the parties of a divorce process, play a vital role in the shared business. Unfortunately, practice shows that a small company without one of its key specialists or founders is often valued at practically nothing. Perhaps the only way forward, in this case, is to continue to work together until the business has gained sufficient momentum for sale to a third party.

The probability of corporate conflict between the former spouses is very high since it will be impossible to make the necessary decisions without each other’s consent. These decisions may pertain to the management of the company, distribution of profits, and the election of executive management bodies. Therefore, for the productive continuation of business activities within the company, all owners of shares must be equally interested in this, regardless of the current status of their personal or family relationships.

Based on the foregoing, it should be borne in mind that the process of evaluating a small business in the context of a divorce between co-owners for its subsequent full or partial re-distribution is not always obvious and transparent. In some cases, along with the appraisal of the business’s value by the court, ordering an independent assessment is recommended to get a complete picture.

Interesting Related Article: “How Is a Business Divided During a Divorce?