Business Assets in Divorce: Valuation and Division

When a Business Is Part of the Marital Estate

Dividing a business in divorce is one of the most complex and contentious aspects of property division. Whether one or both spouses own a business, the process of valuing and dividing the business interest requires specialized expertise and careful negotiation. This guide explains how businesses are treated in divorce and the options available for resolution.

Is the Business Marital Property?

The first question is whether the business or a portion of it is considered marital property. A business started during the marriage is generally marital property. A business started before the marriage may be partially marital if its value increased during the marriage or if the non-owner spouse contributed to its growth.

Contributions that may make a pre-marital business partially marital include direct work in the business by the non-owner spouse, financial contributions from marital funds, sacrifices by the non-owner spouse that enabled the owner to focus on the business, and use of marital assets to grow or sustain the business.

Business Valuation Methods

Accurately valuing a business is essential for fair division. Professional business appraisers typically use one or more of these methods:

Asset-Based Approach

This method values the business based on its net assets, subtracting total liabilities from total assets. It works best for businesses with significant tangible assets, such as real estate or equipment-intensive businesses.

Income-Based Approach

This method values the business based on its ability to generate future income. Common income-based methods include capitalization of earnings and discounted cash flow analysis. This approach is often most appropriate for profitable service businesses and professional practices.

Market-Based Approach

This method compares the business to similar businesses that have recently been sold. It is most useful when there is a sufficient number of comparable sales data available.

Options for Dividing a Business

Once the business is valued, there are several ways to handle it in the divorce:

• Buy out the other spouse: The business-owning spouse keeps the business and compensates the other with cash, other assets, or a structured payment plan
• Sell the business: The business is sold to a third party and the proceeds are divided
• Continue co-ownership: Both spouses continue to own the business together, which requires a strong working relationship and a clear operating agreement
• Divide the business: In some cases, a business with multiple locations or product lines can be physically divided between the spouses

Challenges in Business Valuation

Several issues can complicate business valuation in divorce. Business owners may attempt to undervalue the business by reducing reported income, increasing expenses, or deferring revenue. Personal goodwill versus enterprise goodwill can be a contentious issue, as some states exclude personal goodwill from the marital estate. The valuation date matters, and different dates can produce significantly different values. Minority discounts and marketability discounts may apply but are subject to debate.

Protecting the Business During Divorce

If you own a business and are going through divorce, take steps to protect the business. Maintain accurate and complete financial records. Continue running the business normally and avoid making unusual transactions. Consider a forensic accountant to review the books if you suspect your spouse is manipulating the numbers. Get a professional business valuation from a qualified appraiser.

The Role of Forensic Accountants

Forensic accountants play a crucial role in business valuations during divorce. They can uncover hidden income or assets, trace the commingling of business and personal finances, analyze the business's true earning capacity, and identify excessive owner compensation or personal expenses run through the business.

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