Divorce proceedings are typically difficult enough for all parties involved but imagine also having a privately held or family-owned business for consideration. Questions quickly abound, including:
- Is the business a marital asset?
- Do both spouses have ownership in the business?
- Will one spouse buy the ownership of the other spouse?
- How much is the ownership worth?
These questions are just the tip of the proverbial iceberg when discussing business valuation for divorce purposes. Much like walking the midway, the inevitable turmoil can make it hard to stay focused on your main objective—hopefully a fair, amicable divorce. So let’s discuss three of the main reasons to consider having a business valuation prepared if you are facing a divorce.
Fair Market Value is Not a Guessing Game
Many business owners confuse “sweat equity” with fair market value. If you ask business owners, their perceived business value may be a multiple of gross revenue, a multiple of net revenue, or just a number plucked out of thin air. Unfortunately, applying a multiple to a number in valuing a business may be less accurate than the guy at the fair who guesses fairgoers’ weights.
The bottom line is that many factors impact the value of your company, and no two businesses are exactly the same. Once a valuation has been performed by a qualified professional, the business owners know the business’ fair market value and are better prepared for mediation or court.
Judging the Business Value Prize
It is very common for one spouse to be more heavily involved than the other in ownership of a business. For the uninvolved spouse, the income stream may seem steady while the involved spouse struggles daily to maintain profits. In a divorce case, a business valuation not only considers the historical financial information of the company, but it also looks at the projected future revenues and expenses of the company to determine a fair market value. For example, before the recession of 2008 and 2009, many households were doing well. Therefore, a purchase price only based on historical data would likely be inequitable. As this example illustrates, a business owner runs the risk of paying too much to a former spouse to purchase the marital asset (i.e., the business) when the purchase price hasn’t been justified.
That “Fair” Feeling Might Just Increase the Likelihood of an Amicable Divorce Settlement
Believe it or not, both parties being informed of the actual fair market value can increase the possibility an agreement regarding a reasonable price. There may be small variations, even if both sides retain a qualified valuator, but the likelihood of agreeing on a purchase price or buyout can increase because of the information provided to both parties. Schoolhouse Rock had it right, “Knowledge Is Power!”
Choose to Make Lemonade by Having a Business Valuation Performed
Divorce proceedings are tough. Not knowing the realizable value of your business while going through a divorce is tougher. Have a business valuation prepared by CRI’s valuation team can help guide you through the transition while hopefully making it less difficult.