In many divorces, one or both spouses may hold a business ownership interest. These ownership interests may take the form of a solo professional practice or a partner interest in a closely held or family business. However, the value of these business interests may qualify as marital assets subject to division during divorce, requiring couples and courts to appraise the value of these interests.
Why Business Valuation Matters in Divorce
The court must equitably divide a couple’s marital property during a divorce. Equitable division involves splitting the value of marital assets equitably between spouses based on statutory factors. Business ownership interests, including ownership of a sole proprietorship or an interest in a partnership or closely held corporation, may qualify as marital assets subject to equitable division. As a result, couples who own business interests must determine the value of those interests to divide that value during divorce.
Methods of Business Valuation
In most divorce cases, spouses hire expert appraisers to value their business ownership interests. Appraisers review the company’s financial records to determine the business’s total value, from which the appraiser can calculate the value of the spouse’s interest (accounting for things such as a lack of a liquid market or control premiums).
Typical methods of business valuation include:
- Market Approach – Considers the market price of recently sold comparable companies or comparable businesses available for sale
- Income Approach – Estimates a business’s worth based on the present value of expected future income after considering factors like market conditions, industry trends, competition, and expected growth
- Asset-Based Approach – This approach calculates a company’s value based on the fair market value of its assets after deducting liabilities
During business valuation in divorce, couples may engage in discovery and robust negotiation to resolve disputes over the value of ownership interests.
Challenges in Business Valuation
Valuing and dividing business interests during divorce can raise various challenges, such as:
- Marital vs. Separate Value – When spouses bring business ownership interests into the marriage, disputes may arise over separating the value between pre-marital appreciation and growth in the value of the business interests that occurred during the marriage.
- Restrictions on Interest Transfers – Many closely held businesses have governing documents (such as bylaws, operating agreements, or shareholder agreements) restricting ownership interest transfers. However, a spouse may have the right under equitable distribution laws to a portion of the value of their ex’s business ownership interest. Getting around restrictions on transfer may require compensating the non-owner spouse with equivalent value from other marital assets.
- Stock Options and Other Unvested Interests – Couples and courts may also face challenges in valuing or dividing the value of restricted or unvested business ownership interests, such as stock options or restricted stock units.
Contact a Divorce Attorney Today
When you and your spouse must divide the value of a proprietorship or an ownership interest in a closely held business during a divorce, you need experienced legal representation to guide you through the valuation process. Contact The Law Offices of Dawn K. Gull today for an initial consultation with a divorce attorney to discuss your legal options.