Divorce results in the division of marital property. When a divorce involves a business owner, the business may be subject to division. Business owners can take steps to avoid this, such as the use of a prenuptial or postnuptial agreement. However, absent a business owner’s active attempts to keep the property separate, the business will likely be subject to division during divorce.
How does an owner divide a business during divorce? There are generally two options: the owner can split the business between both parties or retain full ownership in exchange for yielding other property of equal value. In either option, the business generally goes through a valuation.
How does business valuation work? There are three basic approaches to business valuation: the asset, market or income approaches. The asset approach essentially involves an expert taking an estimation of the business’s assets minus its liabilities, the market approach comparison of similar businesses that were recently sold and the income a review of prior, current and future economic benefits to determine a present value.
Once the experts determine the business’ value, they may apply discounts. Restrictions on sale or transfer of the ownership right, for example, can result in a discount of the value of the business for property division purposes.
Unfortunately, business valuation is not an exact science. Each approach can result in a different valuation, and each expert can provide a different estimate even if using the same approach.
What happens next? The business owner will then use the prepared valuations to aid property division negotiations. Ultimately, the parties will attempt to split the assets in a manner that results in an equitable share.