In a divorce where one or both parties have ownership interest in a privately held business, the value of the ownership interest needs to be determined for property division purposes. While the value of a share in a publicly traded company is known because of prices quoted on stock exchanges, determining the value of an interest in a closely held or family-owned business is not as straightforward. One way to determine the value of an ownership interest in a privately held business is to obtain a business valuation. While there are numerous instances where a business valuation engagement may be necessary, it is often a time-consuming process and another client expense that may not be needed in every divorce matter. Yet, for those cases where the business is a significant portion of the marital estate, a divorce attorney should consider various factors to determine if a business valuation is a necessity.
Marital vs. Nonmarital Property
One of the first steps to determine if a business valuation is necessary is to establish whether the business or ownership interest therein is marital or nonmarital property. Nonmarital property is not subject to equitable division, which would negate the need to place a value on the business interest. The business may be nonmarital property if:
- The business was acquired prior to the date of marriage
- The business was purchased with nonmarital funds
The business is likely marital property if:
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- The business was acquired during the marriage
- Marital funds were invested in the business
- Either spouse made significant labor-related contributions into the business during the marriage
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When a business is categorized as marital property, the attorney will then need to consider the various options available to assess value.
Ways to Assess Business Value
If the business is deemed marital property, clients may still avoid the cost and time commitment of a business valuation if the value of the business interest can be determined in another way. Options to consider include:
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- The parties may agree on the value.
If the clients are amicable and can agree on the value of the ownership interest, a business valuation isn’t needed. However, many times during divorce proceedings, the business is a significant portion of the parties’ marital estate or a major source of the family’s income, and the value of the business interest is a major source of disagreement.
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- Attorney- or Client-estimated value.
If the nature of the business owned is relatively straightforward and solely dependent on tangible assets, the attorney or client may be able to place a value on the business. For example, if the business has cash in the bank, limited fixed assets, and some debt, the attorney may determine the estimated value of the business is equal to net book value. Further, some businesses may exist solely to hold assets (e.g., real estate, marketable securities, or an airplane) and were likely formed for tax purposes or legal protection. In the case of an entity whose primary asset is real estate, it may be more worthwhile to get a real estate appraisal—with the thought being that the value of the business is commensurate with the value of the underlying real estate. Nonetheless, the value of the business interest does not necessarily equal the value of the underlying asset(s), because the business interest may not own the asset(s) outright and valuation discounts may be an important consideration.
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- Business calculation.
A business valuation analyst generally offers two levels of service: a business valuation and a business calculation. A business calculation is a lower-level service that offers an indication of value compared to the conclusion of value as determined under a business valuation engagement. In a calculation engagement, the business valuation analyst and the client will agree on the approaches and methods to be used. Any of the standardized methodologies utilized in business valuation are available to assist in calculating the value of the subject interest. However, a business calculation does not include all the procedures required for a valuation engagement, and therefore the report is less thorough. While a business calculation will cost less than a business valuation, its applications are best used for uncontested divorce cases or preliminary negotiations.
Boulay Can Help
Many factors should be considered when determining whether a business valuation is needed in a divorce case. If a closely held business is a component of the marital estate, it is advisable to consult a business valuation expert experienced in marital dissolution. To talk to a divorce financial expert at Boulay, contact Corey O’Connell at 952.841.3025 or coconnell@boulaygroup.com.