Divorce can raise complex issues, such as how to divide a difficult-to-value asset like a small or closely held business. This post explores one of the more complex assets to divide: Business Interests.

When one or both spouses' have an interest in a business, the valuation and division of the business can be highly complex and contentious. This is particularly true for small or closely held companies, where there may only be one or a few owners. This is further complicated by the fact that the business may be the sole source of financial support for the family. Maintaining the health of the business becomes crucial to both spouses.

Business valuations are inherently subjective, leading to significant variations. The value of a business can be dramatically affected by the chosen valuation method, such as income-based, market-based, or asset-based approaches. Within each method, further subjective decisions about assumptions and projections can lead to wide discrepancies in the final valuation. As a result, business valuations can differ greatly, reflecting the inherent subjectivity and complexity of the process.

The three methods to value a business are:   

a.          Market Approach. This approach calculates the value of a business or business interest being valued by comparison with actual transactions information.  The idea is that a prudent buyer will pay no more for a property than it would cost to acquire an equally desirable substitute.  See:  William J. Morrison and Jay E. Fishman, The Business Valuation Bench Book, 69-70 (2017).

b.         Income Approach.  This approach uses the current income of the business to determine the future worth of the business. Very rudimentary, the value is calculated by taking the income of the business divided by a capitalization rate. See:  William J. Morrison and Jay E. Fishman, The Business Valuation Bench Book, 15-16 (2017).

c.          Asset Approach. This approach uses the net assets and liabilities of the business to determine a value.  This approach may be most appropriate with a business that either holds assets (such as real estate ventures, or timber and mining companies). See:  William J. Morrison and Jay E. Fishman, The Business Valuation Bench Book, 55-56 (2017).

Dividing complex assets, such as a business interest, in a divorce necessitates an attorney with experience in valuation of complicated assets. Achieving a fair and equitable division involves carefully considering each asset's unique characteristics and potential future value.

Should you have any specific questions, we would invite you to speak with our team by emailing us at info@5280lawgroup.com or call us at (303) 747-4686.