There is more than one way to value a business in a divorce

On Behalf of | Aug 9, 2021 | Divorce

When Florida couples decide to divorce, property division can be one of the most contentious parts of reaching a settlement. This can be particularly true for the owners of closely-held or family businesses, where the valuation of the enterprise can have a major effect on how assets are distributed. There are several different factors and methods of valuing a business during a divorce.

Determining marital or separate property

The first step in valuing a business is to determine whether it is considered separate or marital property. If the business was founded prior to the marriage, the business as a whole is generally not considered marital property, although an interest in the profits may. On the other hand, businesses formed during the marriage are considered marital property. Since asset and property division in Florida is based on equitable distribution, the value may be imparted to the spouses in different ways so long as the result is fair.

Different types of business valuation

Some businesses may have different regulations determining how they are valued, depending on whether they are a corporation with shareholders, a limited liability company, a partnership, or a sole proprietorship. An asset approach to valuation measures assets minus liabilities. While this appears to be the simplest mechanism, it can lead to additional complexities and is most frequently used for small businesses. On the other hand, a market approach examines the value of other similar businesses recently sold on the open market. However, it can be difficult to agree on sufficiently similar companies. The most common approach measures the income of the business and focuses on future cash flow.

The specific valuation of the company is often disputed between the two spouses, particularly in a contentious divorce. As a result, expert witnesses are often called upon to support one spouse’s preferred valuation.