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How Is a Business Valued in a Divorce?

How Is a Business Valued in a Divorce?

December 19, 2022

Like other assets, businesses owned by divorcing spouses may be subject to the rule of equitable distribution in divorce. If a business is considered marital property, it will need to be valued to determine its worth so that a fair division of assets can be made. In general, a business that one or both spouses started during the marriage is marital property unless there is a legally valid prenuptial or post-nuptial agreement in place that says otherwise. 

A business that one spouse had prior to marriage will typically be considered separate property and not subject to division. Although, with that being said, if the non-business-owning spouse contributed financially or worked for the business during the marriage, even if it was not in an employee capacity, and the business appreciated, that appreciation may be subject to division. 

Before discussing specifics about the process of valuing a business in a divorce, let’s look a little more closely at how divorce can impact businesses.  

How Does Divorce Impact My Business?

Colorado follows the rule of equitable distribution regarding property and debt division in divorce. If your business is considered marital property, like other marital assets, it is subject to the rule of equitable distribution. Under equitable distribution, marital property is divided based on what a judge determines is fair and equitable to both spouses, which does not necessarily mean a 50-50 split. Rather, the judge will consider all the relevant circumstances involved, such as the length of the marriage, earning status and financial contributions of both spouses, each spouse’s contribution to the home and family, how difficult an asset may be to divide and other factors.  Colorado statute § 14-10-113 governs the disposition of property in accordance with equitable distribution.  

If a business is considered marital property, one spouse may be awarded full ownership of the business while the other spouse receives assets of equal or near equal value. Or one spouse may buy the other one out. Or the business may be sold and the proceeds divided between spouses. 

Of course, if you and your spouse are able to come to agreement on your own or with the help of your attorneys regarding the business, then the court will not need to make the decision of how to equitably divide business interests for you. However, in either case, the business will need to undergo a valuation before any determination about how to divide the interests in it can be made.

Process of Valuing a Business

How is a business valued in a divorce? There are generally three different ways of performing valuations. They include using a future-expected-income approach, an asset-based approach and a comparable-market approach. Which method may be best for your situation depends upon the specifics of the business, including its profitability, the assets it owns, whether there are comparable businesses in the market area and other factors.    

Valuation Based on Expected Future Income

The future income approach is the most often used approach for valuing a business. In this approach, the profitability history of the business is used to ascertain how much money the business could be expected to make in the future. The present value of the business is then calculated based on this expected future income. Valuation experts use one of two methodologies under this approach to arrive at business values. They are the “capitalization of earnings” method and the “discounting of cash flow” method. 

Which method is used depends upon the details of the company that is being valued and how stable or unstable the company’s expected future growth and profitability are, among other things. These evaluation methods can be complex and typically require the hiring of expert valuators.   

Valuation Based on Assets

A valuation based on assets looks at the fair market value of the tangible and intangible assets of a business, minus the company’s debts, to arrive at a starting place for valuation. Businesses may have both tangible and intangible assets. Tangible assets include things such as office buildings, storage buildings, money in bank accounts, unsold inventory, company vehicles, office furniture and equipment, manufacturing equipment, supplies and other physical items. Intangible assets include patents, copyrights, trademarks and other intellectual property, client and customer lists, and other items that can be hard to place a value on. Debts include monies owed on credit cards, loans, employee payroll, tax obligations, contracts for services or products, and other business liabilities.  

Valuation Based on the Comparable Market

To determine value using this method, the valuator will analyze all the aspects of the business and then compare it to businesses in your region, that are in the same or a similar industry and with similar profitability, that have recently sold. If you have ever bought, sold or refinanced a home, this method may remind you of the process of getting a real estate appraisal to determine home value. The downside to the comparable-market approach is that there may not be businesses similar to yours in your region that have sold recently. 

Timing of Business Valuation

When should the business valuation take place? Ideally, the business valuation should be performed as late in the divorce process as possible in order to take into account possible changes to the business. These changes could be an appreciation or depreciation in value, property and assets added to the business, or additional debts incurred, for example. 

Getting the Help of Business Valuation Experts

Whether your case is going to trial for the court to determine equitable distribution of property or you are able to negotiate an agreement with your spouse regarding the business and other assets, you may need the help of a Certified Public Accountant, forensic accountant, real estate appraiser or other expert to undertake the complex business valuation process. Critical to getting an accurate valuation is ensuring that any expert you hire is licensed to perform their professional duties. 

You can verify professional and business licenses through the Colorado Department of Regulatory Agencies lookup service. Alternatively, if you work with an experienced divorce attorney, they can assist you in finding reputable valuation experts you can trust. 

One expert may perform the business valuation or you and your spouse may elect to have your own valuators. Sometimes different valuators arrive at different conclusions about the value of a business, which can lead to conflict if one spouse believes a business evaluation is too high and the other thinks it is too low.  

When spouses cannot agree on what a business is worth, the court will examine the valuation records involved and potentially hear expert witness testimony from the valuator or valuators to arrive at a value.

Do I Need An Attorney for a Business Valuation?

It is advisable to have a skilled divorce attorney assist you with your business valuation. An attorney who is familiar with business valuations can help you determine, based upon the size and complexity of your business, whether you need expert valuators to get an accurate value. They can also help you understand what these experts cost to determine whether it makes sense for your situation. 

Experienced business divorce attorneys often have access to reputable business valuation experts that they recommend to divorcing clients. With a professional recommendation, you won’t be left guessing if the CPA or other expert you are paying to undertake the important process of valuing the business is truly an expert at all.    

If you are the business owner, an attorney will advocate for you should your spouse accuse you of trying to hide assets in order to undervalue the business. If you are the non-business-owning spouse, a skilled attorney can investigate to ensure that the business is not undervalued so that you receive the full amount of what your business interests are worth. Your attorney will also assess any operating agreements or partnership restraints that could affect the selling or transferring of business interests.

Once a value is agreed upon between spouses or decided by a judge, your attorney will help to protect your business and its smooth operations. If your spouse owns the business, your Colorado business divorce lawyer will work to ensure that you receive fair assets equal to your interest in the business.  

Are You Worried About What Will Happen to Your Business in a Divorce? Get Help from an Experienced Colorado Business Divorce Lawyer Today.

At The Cossitt Law Firm in Colorado, we advocate for business owners who are worried about what will happen to their businesses in divorce. We also help spouses of business owners in obtaining fair asset division outcomes. Our business divorce lawyer has experience in assisting clients in business valuations and can recommend qualified business valuation experts, when needed, to assist with the process. 

Call us at 970-488-1887 for help with divorce concerns related to division of businesses and other assets. We provide the full range of divorce and family law services to clients throughout the Fort Collins and Greeley area.

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