Business Valuation During the Divorce Process

 Posted on December 29, 2014 in Family Law

When you are going through a divorce, the value of everything you own is considered during the property distribution process. This can include your business. A small business can be considered as part of a divorce settlement whether the couple built it together or one spouse owned it prior to the marriage and continued to develop it afterward. The role each spouse had in the business during their marriage and their intention for the business following the divorce can determine how it can be divided between them.

Options for Divorcing Business Owners

When a business-owning couple divorces, they have a few options regarding its operation:

• Continue to operate the business, which may require the spouse who opts to keep it to buy out his or     her former partner's interest in it;
• Sell the business, which then requires an appraiser to divide the business' value between the spouses; or
• Close the business, which also requires the help of an appraiser to divide its worth.

In cases where the spouses have an amicable relationship and a shared interest in continuing to run their company, divorced couples may opt to continue to operate their business together. This option comes with its own challenges and concerns regarding the company's finances and each partner's responsibility in the event of its failure. Always discuss your concerns as well as your hopes for the future of your business with your attorney before you agree to any type of settlement with your spouse.

How to Value a Business

Four key points are considered during a business valuation. These are:

• Its debts and assets;
• The date of the valuation;
• Its income; and
• The most effective formula to determine the company's value.

A business' value is more than just the court's decision. Usually, a team of experts is involved with the process, including a third-party appraiser or another business owner in the same industry. Together, these experts decide which of the following formulas is best suited to the business at hand:

• The asset approach, which adds all of the business' assets and subtracts any depreciation that has occurred to decide the company's monetary value. This method is straightforward, but can miss some key assets such as projected earnings and future potential.
• The income approach, which bases its evaluation on that amount of money that the company earns and can continue to earn. Projected earnings, expansion opportunities, and interest, as well as depreciation and amortization for the company are considered with the income approach.
• The market approach, which is the most common method used by couples who choose to sell their business. This method compares the company to its peer companies and evaluates its health by considering the current state of the market, the company's relationship with its customers and employees, and all variables that can affect the business in the future.

Contact an Illinois Divorce Attorney

At the Law Offices of Cosmo Tedone and Barbara Morton, we put our clients' needs first. If you are going through the divorce process and you are worried about how it will affect your small business, contact one of our firm's experienced Joliet divorce attorneys to learn more about how you can take a proactive stance and make the most of your divorce settlement.