Valuing a Business
Valuing a Business: What you need to know.
As part of the divorce process, assets and liabilities must be divided. To divide the assets, we first must determine their value. If the asset is a bank account, the value is straightforward. If the asset is a business, the process will be more complicated, usually more time consuming, and sometimes will require an expert.
The initial analysis your attorney will make is whether the business is considered separate or marital property. Generally, marital property is earned or acquired during the marriage; separate property is obtained or earned prior to the marriage. There are always exceptions. For example, a spouse may receive a portion of the separate property if the judge finds that a spouse contributed to the business; or if he or she has a need for financial support, the judge may invade the separate property, including the business.
Our attorneys will ask you for information about the business such as financial records and corporate records to make an initial determination about your spouse’s potential ownership interest.
Often during the divorce proceedings, we will ask your spouse to produce information about the business and what they believe is their and your ownership rights in the business. This process is called discovery and it will clarify if the divorce can be settled or it will allow us to prepare for trial.
If you and your spouse have vastly different opinions about the value of the business, our attorneys may suggest that we retain an expert to value the business. In Michigan, there are several methods to value a business: an asset, a market or an income approach. Your attorney and business valuation expert will determine which approach is appropriate in your case.
As the names suggest, an asset valuation approach values the business based on its assets. An example of utilizing this approach would be a business owning real estate. An expert may use a market approach where the business is in the service industry and uses knowledge as a commodity. When the expert uses a market approach, the expert will provide comparable sales data for similar businesses. A business’ value is determined with an income approach when the expert reviews the business’ profits and earnings.
Sometimes spouses agree to retain one business valuation expert to determine the value; if the dispute and distrust between spouses or the value of the business is significant, our attorneys may suggest that you retain your own business valuation expert. If the two experts do not agree on the business value, the judge will listen to testimony from each expert and determine the value of the company.
Not every business must be valued by a valuation expert. For example, if the business mostly holds real estate, spouses may agree to appraise each of the properties, and each spouse is awarded an equitable share of the real estate.
We often find that the spouse who has never been involved in the business has no idea about the business’s value. Just because the business owner only took a minimal draw or paycheck from the company does not mean that the company has minimal value. Agreeing to a business’ value without reviewing its accounting records may create a rude awakening when the business owner is suddenly able to live a lavish lifestyle after the divorce or sells the company for a significant sum of money. Because each party has a right to perform discovery to learn about the company’s income and value, regret about a divorce settlement is not an option when a final divorce judgment has been signed.
It is important to hire an experienced divorce attorney to determine a fair value of a business. Call Kraayeveld Law if you need to file for divorce and you or your spouse owns a business.