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How Are Businesses Valued During a Divorce?

Posted on October 10th, 2018

Divorces can be a stressful process, especially if you and your spouse have contested issues that require legal intervention to resolve. Yet even the most amicable of divorces can have complications whenever a business is involved. How does ownership of a business affect the distribution of marital property?

Division of Business Property During Divorce

Pennsylvania divorce laws allow for separate property owned by just one spouse and not the other. Often, this property includes anything acquired or purchased before the marriage. A business will likely be separate property if one spouse conceived the idea for most of the business value before marriage. In that case, the value of the business would stay with the spouse that owns it.

If the value of the business comes from the time and effort put into the business, any income is likely to be marital property. For cases where both spouses own or have contributed to the business value, then it’s also marital property.

Determining the Value of a Business for a Divorce

As an equitable distribution state, Pennsylvania will distribute marital property in a way that the court believes is fair. When a business is a marital property, it’s necessary to determine the value of the business in the distribution of assets. This can be a complicated process because of all the factors that can impact the value of a business:

  • Business property
  • Debts the business owes
  • Income
  • The formula used to determine the value

Across divorces, several methods exist to determine the value of a business. The “asset” method involves adding up the value of everything the business owns, including tangible and intangible assets. You then subtract the liabilities of the business from your assets to determine the starting value.

Another common method is the “income” approach, which takes your financial history and combines it with a calculation of the potential future value of the business. Calculations for this method change regularly, so it’s best to work with a business valuation professional to get an accurate value.

You can also use the market approach to value your business, which involves comparing your business to similar business sales in your area. However, this method runs the risk of not being as reliable or accurate as other methods.

Regardless of the method you use, it’s often in your best interest to have professional help when valuing the business, be it a skilled attorney or a business valuation professional. Incorrectly valuing your business can have a negative impact on determining your marital assets and could leave you with a disproportionately low share of marital property from the divorce.

Aside from receiving help with valuing your business, you can ensure a fair assessment of business assets by carefully selecting your date of valuation. Divorces can easily be lengthy processes, especially during a contested proceeding. If you value your business at the start of the divorce, you’re risking the value changing throughout the course of divorce due to additional profits or debts. It’s in your best interest to set a date of valuation for as close to the divorce date as possible.

Distributing Marital Business Assets

Once there is a net value of the business, you and your spouse can determine how to distribute value. It’s possible to sell the business, continue running it as partners, or have one spouse buy the other spouse’s portion of the company. If you disagree over these issues, you will likely need to enter mediation or resolve your issues in court.

Determining the value of a business is a difficult process in any situation, let alone during a divorce. An experienced divorce attorney can help you determine which valuation method is best for your circumstances.