Divorce proceedings are typically difficult enough for all parties involved but imagine also having a privately held or family-owned business for consideration. Questions quickly abound, including:
- Is the business a marital asset?
- Do both spouses have ownership in the business?
- Will one spouse buy the ownership of the other spouse?
- How much is the ownership worth?
These questions are just the tip of the proverbial iceberg when discussing business valuation for divorce purposes. Much like walking the midway, the inevitable turmoil can make it hard to stay focused on your main objective—hopefully a fair, amicable divorce. So let’s discuss three of the main reasons to consider having a business valuation prepared if you are facing a divorce.
Fair Market Value is Not a Guessing Game
Many business owners confuse “sweat equity” with fair market value. If you ask business owners, their perceived business value may be a multiple of gross revenue, a multiple of net revenue, or just a number plucked out of thin air. Unfortunately, applying a multiple to a number in valuing a business may be less accurate than the guy at the fair who guesses fairgoers’ weights.
The bottom line is that many factors impact the value of your company, and no two businesses are exactly the same. Once a valuation has been performed by a qualified professional, the business owners know the business’ fair market value and are better prepared for mediation or court.
Judging the Business Value Prize
It is very common for one spouse to be more heavily involved than the other in ownership of a business. For the uninvolved spouse, the income stream may seem steady while the involved spouse struggles daily to maintain profits. In a divorce case, a business valuation not only considers the historical financial information of the company but also looks at the projected future revenues and expenses of the company to determine a fair market value. For example, before the recession of 2008 and 2009, many households were doing well. Therefore, a purchase price only based on historical data would likely be inequitable. As this example illustrates, a business owner runs the risk of paying too much to a former spouse to purchase the marital asset (i.e., the business) when the purchase price hasn’t been justified.
That “Fair” Feeling Might Just Increase the Likelihood of an Amicable Divorce Settlement
Believe it or not, both parties being informed of the actual fair market value can increase the possibility of an agreement regarding a reasonable price. There may be small variations, even if both sides retain a qualified valuator, but the likelihood of agreeing on a purchase price or buyout can increase because of the information provided to both parties. Schoolhouse Rock had it right, “Knowledge Is Power!”
Choose to Make Lemonade by Having a Business Valuation Performed
Divorce proceedings are tough. Not knowing the realizable value of your business while going through a divorce is tougher. Have a business valuation prepared by CRI’s valuation team can help guide you through the transition while hopefully making it less difficult.
FAQs
In a divorce case, a business valuation not only considers the historical financial information of the company but also looks at the projected future revenues and expenses of the company to determine a fair market value.
Can a CPA perform a business valuation? ›
A CPA may be able to contribute certain pieces of information about the business valuation process, however, they generally do not possess enough expertise and experience necessary for a complete assessment.
How to value a business for divorce in the UK? ›
The most common methods used are the capitalised future maintainable earning method and the net assets method. Valuing a business on an earnings basis involves calculating the amount of earnings, often in the form of turnover, EBITDA or post-tax profits, which the company can sustain for the foreseeable future.
Who pays for a business valuation? ›
In this case, who pays for the business valuation? Typically, the answer is you. A business valuation professional will need access to information and data – lots of it. Some of this is sensitive and confidential; a buyer would not have access to it, and this means their valuation would not be thorough or accurate.
Is it better to sell a business before or after divorce? ›
If you and your spouse are in agreement to sell the business, you may not have to wait on the divorce to complete the sale. However, the best course of action is to consult with a family law attorney before finalizing any sale of a business or other large asset before the divorce.
What is a CPA not allowed to do? ›
Rule 302: A member in public practice shall not: Perform for a contingent fee any professional services for, or receive such a fee from, a client for whom the member or the member's firm performs: An audit or review of a financial statement; or.
Who is qualified to do a business valuation? ›
Professionals in varying occupations may claim to be business appraisers, but only accredited business appraisers have the training and expertise needed to provide accurate and defensible business valuation reports.
Who prepares a business valuation? ›
Business Broker
Many business brokers offer to prepare a business valuation for prospective clients. Some business brokers offer a free report as a lure to induce prospective clients, but most experienced brokers charge a fee for a valuation.
How to divide a family business fairly? ›
Consider leaving 51 percent to the child who will run the business, given his or her management responsibility, and 49 percent to the other. Then, draft an agreement that the former will buy the latter's shares on a predetermined schedule.
What percentage of business owners get divorced? ›
Entrepreneurs and small business owners are among those groups that typically have higher divorce rates, with many studies showing the rate at around 50%. Recognizing that there might be an elevated risk of family challenges ahead doesn't necessarily need to deter someone from pursuing their entrepreneurial ambition.
Here are a few simple tips that can help you to bring a sense of well-being and self-respect back into your life.
- Accentuate the Positives. ...
- Write Down Everything That Lifts You Up. ...
- Act the Way You Want to Feel. ...
- Allow Yourself to Mourn. ...
- End the Blame Game and Move Forward Gracefully. ...
- Shift Into Neutral.
Entrepreneurs and small business owners are among those groups that typically have higher divorce rates, with many studies showing the rate at around 50%.
Should you start a business while going through a divorce? ›
It's possible to start a business during your divorce proceedings. You could start the business alone or with a business partner. However, enlisting the support of an experienced attorney can help ensure that the new business remains yours as the implications for each divorce case are unique.
How to value a self-employed business? ›
Valuing your business can look a lot like determining your home's list price. If similar businesses have recently sold in your area, their selling prices will show you how to value your company. It might even be the most accurate yardstick you can find to value a business. Close comparisons are tough to find, though.
How do you value a company? ›
These methods can include:
- entry valuation.
- discounted cashflow.
- asset valuation.
- times revenue method.
- price to earnings ratio.
- comparable analysis.
- industry best practice.
- precedent transaction method.
