Matrimonial and Family Law Blog

Tuesday, January 23, 2018

How Do I Value My Business During a Divorce?

How Do I Value My Business During a Divorce?

Business valuations are usually contentious during a divorce. The person who wants to keep the company puts a low value on it to minimize the cost to buy out the other spouse’s interest. The person who is not keeping the business wants a high value to maximize the amount of buyout received. Spouses rarely agree on the value of a business at the outset when going through a divorce. If you are in this situation, you’ll likely benefit from the assistance of a family law lawyer.

Even the experts can disagree on the methodology you should use in a business valuation. There are three factors you must take into account:

  1. The fair market value method. If you were setting the value for tax purposes or most reasons other than a divorce, you would use the fair market value. Under this approach, the fair market value is the amount a well-informed buyer and seller would agree upon for the sale of the business if neither was compelled to buy or sell. This base number then gets reduced by discounts, such as lack of control and lack of marketability.
  2. The fair value method. New York divorce courts use the fair value method of valuing businesses, not to be confused with the fair market value method. The fair value method starts with the base fair market value, but only applies the lack of marketability discount and not other possible markdowns in value. New York divorce courts would find it unfair to the spouse who will not keep the company to discount the ownership interest. Our courts treat divorce business valuations similar to a distressed/oppressed shareholder situation.
  3. Courts are aware that the profit and loss statements are usually less than accurate in a small business because of things like personal expenses masquerading as business expenses, discretionary expenses, and business perks. The divorce court will consider the amount of money the couple or family took out of the business as income, as well as personal expenses, perks, and other items. Sometimes it is worth more to the spouse who does not get the business to adjust the value of the business a little lower in exchange for bumping up the income of the other spouse to increase the alimony. The difference in alimony can more than offset a lower business interest buyout.

Expert witnesses

Courts usually require expert testimony of business valuations in divorce cases. These experts charge thousands of dollars to create complicated reports and thousands more to testify at court, but they are necessary. If you and your spouse cannot agree on a business valuation expert, you have two options: you can each hire your own expert and let the court decide who it believes or you can each designate an expert, but neither of those firms will serve as the expert. Instead, they will select the one business valuation expert for the case.

Equitable Distribution

New York divorce courts have to divide marital property equitably. If one spouse is getting a large asset, such as a business, the court might award other assets of high value to the other spouse to offset the business. The courts try to apportion the assets so that both spouses get an income-producing property, or they may increase the amount of alimony to provide cash flow to the spouse who does not receive income-producing property.

Any divorce that involves valuing and distributing a business is a highly complex case. You should have an experienced New York divorce lawyer on your side to work with the expert witnesses and make your case to the court. Schedule a consult with one of our New York divorce lawyers to advise you during your divorce.

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