Best Practices of Valuing a Closely Held Business in Divorce

Divorces aren’t always easy, especially if you and your partner were business co-owners. When you begin valuing and dividing assets, it includes ownership.

Let’s talk about what you can do instead to survive the process and avoid a lengthy one. 

Business Valuation

A closely-held business has a small number of stockholders who don’t trade their stock in front of the public. When two people own a closely-held business together, the court or the couple will decide who gets what, but most of their involvement is in the management and operation.

It’s essential to get an accurate picture of the value of the business. If the business is a part of the couple’s marital and not separate property, the value of the company could be split 50-50. You don’t want to miss out.

If the partners can agree on a business valuation, whether it be private practice or a retail store, then a court decision may not be necessary. If they partake in a spiral of disagreements, then a judge will have to step in and look over the evidence.

In collecting the right amount of proof, make sure you have the following documentation ready for action:

• federal/state tax returns
• Financial statements (personal AND business)
• Balance sheets
• Buy/sell agreements

While some cases may require more information on the company, this list is the absolute minimum. If you’re taking it to court, the other spouse will try to show the exact opposite of your claim, so you need to defend your argument confidently and with ample evidence.

Here’s are the main factors that the court uses to judge a business:

• General nature of business
• Economic outlook
• Book value of stock
• Earning capacity
• Goodwill
• Comparison of similar business’ stock market values

Even though these are the pieces considered, a calculated formula does not exist. Each situation has its own needs to be determined and met. But how?

What Are Your Options?

Whether you or a judge is deciding on the matter, stock valuation raises many challenges during a divorce. Luckily, multiple methods are available to help you deal with your circumstances.

There are three techniques to know:

• Market approach
• Income approach
• Asset approach 

First, the market approach compares similar businesses’ market values and sales. This allows for an assessment of what buyers are already paying for. If you have a unique business, a market approach may not be the right path.

Instead, trying the income approach is another option and the most common. After figuring out company income, normalizing costs, and applying a capitalization rate, the evaluator can then determine the value of the business. 

If that doesn’t sound right for you, you can consider using an asset approach that looks at the sum of the business assets without the liabilities. The simplest asset approaches are based on replacement costs and any tangible assets like inventory.

The asset approach also includes intangible assets such as patents and/or trademarks but not the goodwill value of the business. Essentially, goodwill value is the business value minus the value of tangible assets. 

This is often split into personal/professional goodwill and enterprise goodwill. The personal category includes everything associated with the business’s spouse, whereas enterprise only defines the business itself. 

In addition, the total value of the spouses’ business can also include the evaluation of expected earnings, attendant risks, market dynamics, the industry itself, and the entirety of their economic competition.

You may be thinking, “this is a lot of work and hassle. Is this really necessary for my divorce?” 

If your business is considered separate property, it’s not required at all. But, if the court rules your company as a part of marital property and you don’t value it, you might miss out on many benefits. 

In addition, you and your spouse can consider continuing a co-ownership, selling the business and dividing the profits, or buying out the other. 

Where to Start?

Going through a divorce shouldn’t take a toll on your life. However, doing it alone can make it tedious for anyone, especially during the most important and time-consuming part. 

To value and divide stock fairly, you should hire a professional to help. If a minority or marketability discount accompanies your business, your valuation will look a lot different than you may have expected. 

Fortunately, an expert can tell you precisely what you need to know about the future of your business. At Miod and Company, we are here to help.