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Calculating business valuations during divorce

On Behalf of | Sep 15, 2021 | Property Division

The cost of a divorce, both emotionally and financially, is something people don’t always think about when they decide to split. For a small-business owner, however, understanding the financial implications of property division is crucial for them to be able to protect their business interests moving forward.

Business valuations can be quite complicated during a divorce, and the help of a professional is beneficial. A business expert will examine all aspects of the business, its history, performance and investment-related proceeds. Timing the valuation close to the date of the hearing is important as well, as the value of the business may change as a complex divorce proceeding continues.

Property division in New York

One of the challenging tasks for both spouses in a high-asset divorce is the inventorying of marital assets. The court will consider as marital property anything that either spouse acquired during the marriage, such as bank accounts, real estate, cars, income, jewelry, and stocks, as well as commingled property or debt. In Suffolk County and throughout New York, a judge will determine an equitable or fair distribution of marital assets, but is also likely to approve a divorce settlement that couples have agreed to on their own.

Although the business that one spouse launched before the marriage is separate property, the assets acquired from it during the marriage, such as profit, dividends, or its increased market value, are not. And if the non-owning spouse contributed to the business’s growth in any way, they will most likely have some ownership interests in the profits.

Different approaches to valuation

There are typically three methods for completing a business valuation:

  • The asset method values tangible and intangible assets against liabilities of the company. Determining the value of an asset, however, can be complicated, whether it is inventory or office equipment, vehicles, or computers.
  • The less common market approach evaluates similarly sized businesses that have sold in order to arrive at a market value of the entity.
  • Using cash flow and profits, including proceeds from investments, the income method assesses past revenue performance to measure a projected future value. Financial professionals use this type of evaluation most commonly in high net-worth divorces.

Other considerations

The entity’s business structure is also a factor in the determination of property division in a divorce. If it is a sole proprietorship, there will be an equal division of the business between the spouses. State law will influence the valuation of a registered limited liability company, and the receivable dividends of shareholders in a corporation will be a component of the business evaluation.