It can be very difficult to business owner to objectively place a dollar number on his or her business. But if you are a business owner, and you are facing a divorce, it is extremely important that do your best to come up with an accurate number value.
In some divorce settlements, a business is awarded to one spouse – and often that spouse is expected to compensate the other spouse for his or her share of the business. In other cases, the business will be divided between the spouses in some manner. Because of this unpredictability, there can be dire consequences to overvaluing your business, and to undervaluing your business.
It is common for a business owner to fall into the temptation of providing a value that is too low. They assume that they will receive the business in the divorce settlement, and so they undervalue the business, so that they won’t have to pay out much to their spouses. But if you take this approach, what happens if the court accepts that low figure, and then awards your spouse the business – and then you receive a small payout based on the low figure you gave the court?
There are steps you can take to help ensure that your business will be valued accurately:
1. Find a professional you can trust. Valuing a business is extremely complicated, and requires a good deal of expertise. Many forensic accountants specialize in valuing businesses. Paying a fee to an expert is well worth the benefit you will receive in return – and their advice can help you avoid a lot of headaches later on. Ask your attorney for a recommendation on who to hire.
2. Consider what method serves you best. There are generally three different methods for valuing a business, and each has its advantages and disadvantages. These are the market approach, the asset approach, and the income approach.
The market approach involves locating business similar to yours – preferably in your area – that have recently been sold. This can be difficult if your business is unusual, but in many cases it is the most accurate approach, and it usually requires the least guesswork.
The asset approach looks at your assets and liabilities, and adds and subtracts them in order to determine an estimate of your business’s worth. It effectively asks how much money the business could make if it was liquidated and sold, once all of the debts are subtracted.
The income approach is based on how much money your business brings in, and how much it is expected to bring in going forward. It also takes into account how much the business would be worth without you running it.
As you can imagine, making an estimate of how much money your business will make in the future can be difficult. But some businesses (particularly new ones) that aren’t bringing in much money in the present can be expected to do much better in the near future, and this approach is best for gauging their value.
If you hire a specialist to help you value your business – and you should – you should discuss with him or her which of these approaches would be the best. Different types of businesses require different approaches, and you may be able to provide your valuator with information that will make the choice easier.
3. Form a strategy. It is important to decide in advance what you plan to ask for. Do you want to keep the business? Do you want your spouse to have the business, and pay you a credit for your share of it? Do you want to continue to own the business jointly with your (soon to be former) spouse?
There are some cases in which it makes sense to divide a business between two spouses, rather than having one spouse keep it and pay a credit to the other spouse. For example, if the business can be easily divided into two businesses, that may be an ideal solution. Or if both spouses have been running the business together, and they believe they can continue running the business together amicably.
Another example is when a spouse is unlikely to have the funds available to pay a credit to the other spouse. If your business is valued highly, and you are low in cash, the consequences can be disastrous if you are awarded the business, and expected to pay your spouse a large credit. In a case like that, the business could be liquidated, just so that you can afford to pay your spouse for his or her share.
But in most cases, it is less than ideal for two former spouses to run a business together, especially if you would both have equal shares of the business. What will happen when you disagree on major issues?
You should think about this issue carefully before you request that the business be kept intact, and divided between you and your spouse. Sometimes business owners agree to conditions like this out of fear that they will lose the business to their spouse if they don’t accept an agreement. While this can be a valid concern, you should not let fear guide your decisions during this process.
4. Speak to an attorney – if you haven’t already. An experienced divorce lawyer will have handled cases involving business owners, and will be able to guide you through the decisions you’ll be making, and advise you on how to protect your business during this difficult time.