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High-Asset Divorces: Dividing Small Businesses

A man and woman are working together, business valuationSmall business owners who are divorcing have added property division challenges in properly valuing their businesses for the distribution of property. There are several different ways that businesses are valued, and the specific approach chosen may depend on the audience who will be considering the information.

Business Valuations For Litigation or Arbitration

When a case appears headed for divorce litigation or arbitration, the judge or arbitrator will want evidence about the value of the business that is highly reliable and valid. For these types of divorce resolutions, small business owners will want to obtain full business valuations. These should be performed by accredited business valuators rather than simply by certified public accountants. These experts have additional training beyond what is required for CPAs in the proper valuing of businesses.

Full business valuations should take into account the following:

  • The business’s intangible assets
  • The professional and enterprise goodwill of the business
  • Cash on hand, accounts receivable and outstanding contingency fees
  • Controlling and minority interests in the businesses
  • The reasonable compensation for the work performed.

Business Valuations For Mediation and Other Out-of-Court Settlement Negotiations

For out-of-court negotiations in cases in which the spouses trust each other and are likely to resolve their property division issues amicably, full valuations may not be necessary. In these cases, a less-robust method called calculating the value of a business may be used. While this approach is less costly, it is not considered to be as reliable as a full business valuation and should not be the choice for cases heading to litigation. A Lake County divorce attorney will likely determine whether a full valuation or a calculation of value is more appropriate on a case-by-case basis.

Three Approaches to Valuation of a Business

There are three main approaches used in Illinois for business valuations in divorces. Complicated businesses may require a combination of all three methods.

The market approach is an appropriate method to use when the couple decides that they will sell the business and divide the proceeds between them. With this method, the business is compared to others that are similar in the market. This helps to determine the viability of the business and its ongoing prospects. The valuation expert will look at the business’s transactions and compare them to transactions made by similar businesses. He or she will also take into account the business’s enterprise goodwill and other assorted factors.

The asset approach for business valuation is straightforward and best used for businesses that are not highly complex. With this method, the depreciation of the business is subtracted from its total assets to arrive at a value. This method might also be good for divorces involving businesses that were owned by one spouse prior to the marriage but that have increased in value during the marriage because it can be used to calculate the value attributable to the marital estate.

The income approach considers the business’s potential to grow, its current income and its projected earnings in order to arrive at a value. The valuation expert may look at the business’s capitalized returns over a set period of time and then use those to project the company’s potential future earnings and growth. This approach is the one that is most commonly used in divorce business valuations, and it helps to inform spousal and child support decisions.

When Neither Spouse Wishes to Leave the Business

In some cases, both spouses will want to remain with the businesses following their divorces. Couples who are amicable may be able to continue jointly operating their businesses, but it will be important for them to draft new contracts that clearly outline the respective roles and interests each will have after the divorces are final. The contract drawn by a Lake County divorce attorney should clearly define each spouse’s individual interests in the business rather than looking at the business as a marital asset.

Why Reasonable Compensation Is Important in Business Valuations

A Lake County divorce attorney is likely to want to know what a business owner should expect for reasonable compensation. This is important because there are some cases in which a divorcing business owner will pay himself or herself less in order to make it appear that the business is doing less well than it is. A business valuations expert will look at the reasonable amount of compensation that the business owner should earn rather than simply accepting what the owner reports as income at face value.

When a person is divorcing and the case involves a small business, a Lake County divorce attorney will determine which approach to take based on the facts of the case and the complexity of the business. Business valuations will necessitate choosing the proper expert to arrive at a value that is reliable.