How Is the Value of a Family Business Determined During a Divorce?

 Posted on April 16, 2022 in Divorce

Issues related to the property a couple owns are often some of the most complex factors that need to be addressed during the divorce process. While multiple types of assets and debts need to be considered during the property division process, determining how to handle ownership of a family business will often be one of the most consequential decisions. Whether a business is considered to be marital property because it was founded after the couple’s marriage or separate property that a spouse owned before getting married, it will be essential to perform a business valuation to determine the value of this asset.

Business Valuation Methods for Divorcing Business Owners

It will be important for both spouses to make sure a business will be handled correctly during their divorce. A family-owned business may be a source of income for one or both spouses, or it may represent a large portion of the couple’s total assets. Even if a business is a separate asset solely owned by one spouse, it will be important to determine the value of this asset to ensure that both spouses have an understanding of their individual financial resources. This can not only ensure that marital property will be divided fairly and equitably, but it may also help determine whether spousal maintenance will be appropriate. 

When performing a business valuation, one or more of the following methods will usually be used:

• Calculating assets and liabilities - In many cases, the simplest way to value a business is to add up all of the assets the business owns and subtract any debts or liabilities. Assets may include anything of value, such as product inventory, equipment, accounts receivable, intellectual property, or even goodwill in the community due to the reputation of the business owner. This method is often used for established small businesses and other family-owned companies.

• Market value - To get an idea of the potential price that a business would receive if it was sold, a business owner may review the market to look at the purchase price of other similar businesses that were sold recently. This method may be preferred if a couple plans to sell a business during their divorce. However, it may not necessarily provide an accurate valuation, since there may be no recent sales of similar businesses within the local market, or a business may be unique enough that there are no valid comparisons. 

• Reviewing income, earnings, and growth - In addition to determining a business’s present value, it can also be important to gain an understanding of how its value may increase in the near future. To address this issue, a valuation may consider the current and past earnings of the business to provide an estimate of how the income it generates may be expected to increase or how changes in the market may affect the business’s overall value. This can help ensure that spouses fully understand the present and future value of the business so that it can be considered correctly when dividing marital assets.

Contact Our DuPage County Business Valuation Lawyers

If you or your spouse are a business owner, you will need to determine the role that business interests will play in the property division process during your divorce. Farooqi & Husain Law Office can help you understand the best business valuation methods to use, and we can advocate on your behalf to make sure your financial interests will be protected. Contact our Oakbrook Terrace asset division attorneys at 630-909-9114 to set up a consultation and get the legal help you need during the divorce process.

Sources:

https://www.ilga.gov/legislation/ilcs/documents/075000050k503.htm

https://www.smbceo.com/2019/11/19/how-to-value-a-small-business-for-divorce/

https://www.chicagobusiness.com/custom-media/roundtable-family-business-valuations.html