When a husband and wife who are divorcing own a business, the divorce judge must divide or allocate the business the same as with other assets.  It is not common for a business to be sold and the proceeds split up in a divorce, though this is one option available to the court.  More commonly, however, the court awards the business to the spouse who is more active in running the business and orders that spouse to pay the other half the value of the business.

In order for a judge to determine how much the spouse who receives the business will have to pay the other spouse, the judge must know how much the business is worth.  This typically requires the business to be appraised.  Business appraisers generally rely on three methods or “approaches” in determining the value of a business.  Following is a brief discussion of the three approaches:

  1. Asset Approach.  The asset approach to business valuation attempts to place a value on the business based on the assets it owns.  Assets could include real estate, equipment, accounts receivable, cash reserves and other tangible and intangible assets.
  2. Market Approach.  The market approach uses historical sales of comparable businesses to determine the value of the subject business.  The appraiser looks at businesses of similar size and revenue and analyzes the sales prices of those businesses.  Based on the comparable sales, the appraiser renders an opinion as to the value of the subject business.
  3. Income Approach.  The income approach attempts to place a value on the business based on the expected future profits.  Potential business buyers want a return on their investment that is reasonable based on the riskiness of the business.  A business appraiser applying the income approach attempts to assess the present value of the business based on the expected likelihood that the business’s profit stream will continue into the future, taking into account risk and lack of marketability.

Different appraisers appraising the same business may come up with vastly different valuations, as there are more variables which affect the value of a business than those which affect, for example, the value of a typical piece of real estate.  Furthermore, the spouse who is active in the business and is expected to be awarded the business may be motivated to seek a “low-ball” appraisal to reduce the amount she will have to pay her husband to buy him out.  By contrast, the “out” spouse (the spouse not active in operating the business), in an effort to receive as much as possible for his business buyout, may seek out an appraisal that is unrealistically high.

Given the potential for competing business appraisals, dividing up a business in a divorce is often one of the hardest issues to settle outside of court.  It is often advisable for the parties and their lawyers to participate in private mediation once the business appraisals have been completed in an effort to settle these difficult issues.  When a business is at stake, it is important for divorce litigants to retain counsel who understand the complex financial issues in valuing and dividing business entities.

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