Small business owners put their heart and soul into their companies. But if you’re headed for divorce, it’s important to evaluate its worth with a sharply discerning eye. This can be one of the more challenging elements of the split, legally speaking.
As our Essex County divorce attorneys can explain, assets accumulated during a marriage must be divided fairly between spouses in a process called equitable division. Depending on the circumstances, professionals may need to be involved. It should be noted, though, that there are several different approaches to valuation of a business for purposes of equitable division. Depending on the focus of each method, outcomes may vary substantially. It’s important to discuss your options and next steps with an experienced divorce lawyer.
Marital or Separate Interest
One of the first measures in determining the value of a small business for a divorce is to figure out how that value or interest is going to be split. Some things we’ll be considering:
- When the marriage started.
- The founding date of the marriage.
- To what extent the non-owner spouse helped/contributed to the growth of the business.
In cases where the business was founded prior to the start of the marriage, it may be considered separate property instead of marital property (meaning it would not be subject to equitable distribution). However, if the non-owner spouse helped contribute in some way to the growth and prosperity of the company, then they may be entitled to a portion of the profits or some other offset.
Organizational Structure
Another aspect that will need to be weighed is the organizational structure of the business. Some companies may have their own internal rules about how much they are worth and/or how they are divided if an owner, co-owner or founder gets divorced.
In cases of a sole proprietorship, the business could be halved between the spouses. However, in the case of a limited liability company, the value might be decided by New Jersey state laws (or those of whichever state the business is headquartered). In the case of a corporation that has shareholders, shareholders will need to be considered when it comes to valuation and division.
Methods of Business Valuation
Once there have been determinations regarding marital/separate interest and organizational structure, then we can examine which valuation method would make the most sense for that particular client.
Below are several methods we might consider for the task:
- The market approach. This method looks at other businesses of the same nature and size that have been sold recently. It’s similar to how you might look at the real estate market and what similar properties go for. This would only work if there are comparable businesses in the same area and with the same niche as the one at issue. If there aren’t comparable companies, this method might not be suitable.
- The income approach. This approach looks at how much the business makes and how its past revenues might predict the future income of the business. It looks closely at projected profits. The business’s “income” is usually determined by the sum value of proceeds of all goods and services sold, and includes any proceeds from investments.
- Asset approach. This employs a formula of assets minus liabilities. At first blush, this seems probably the simplest breakdown, but it can quickly get complicated. For example, it can be pretty easy to put a value on something like a company vehicle or computer, but calculating the value of inventory or equipment can be a little tougher. It’s important that you’re working with an experienced divorce lawyer with excellent professional contacts.
The way a business valuation is done can impact the final figures and the terms of equitable distribution. If you are a business owner considering divorce in New Jersey, our Essex County divorce lawyers can help you navigate the legal challenges.
Call Rozin|Golinder Law, LLC today at (732) 810-0034 for a free and confidential consultation.