What does a business valuation during divorce entail?

On Behalf of | Jan 30, 2024 | Divorce

A business valuation during a divorce is a complex process that plays a crucial role in ensuring a fair distribution of assets. When one or both spouses own a business, its value must be assessed to determine how it factors into the marital estate. 

Business valuation in the context of a divorce isn’t just about determining the business’s current market value. It also involves understanding how the business’s value contributes to the overall assets of the marriage. 

Determining the type of valuation

The first step in a business valuation during a divorce is deciding on the valuation method to use. Common approaches include asset-based, market-value, and income-based strategies. The choice depends on various factors, including the nature of the business, its financial history and future earning potential.

Assessing the business’s assets and liabilities

A thorough examination of the business’s financial statements is essential. This involves reviewing assets, liabilities, revenue streams, expenses and debts. The goal is to get a clear picture of the business’s financial health and potential future earnings. This assessment can be complicated if personal and business finances are intertwined.

Determining marital versus separate property

In a divorce, it’s important to distinguish between marital and separate property. If the business was started or acquired during the marriage, it’s likely considered marital property. However, it might be classified as separate property if it was established before the marriage or through separate funds. The distinction is crucial for determining how the business’s value is divided.

Role of professional appraisers

Given the complexity of business valuations, professional appraisers are often employed. They consider various factors, including the business’s market position, industry trends, and the economic climate. Working with a legal representative who can assist with property division is beneficial for any business owner going through a divorce.