Business Valuation And Division After Divorce
Equitable distribution states, such as Illinois, courts equitably divide assets and debts during divorce. The assets and debts are considered the couple’s marital property, and the division of such property can be complex. Businesses may also fall under the umbrella of marital property. The two parties will have to appropriately divide the interest they share in the business, often requiring the assistance of expert witnesses to value the business’s assets effectively
Businesses Can Be Considered Marital Assets
Businesses will automatically be considered marital property if the spouses are co-owners. However, there are several additional ways in which a business may be deemed marital property. For instance, if the business was formed after the two parties married, it will likely be considered marital property. Alternatively, when businesses are formed prior to marriage, they likely will not be included in marital property. An exception to this would be if the other spouse made direct or indirect contributions to the business throughout the marriage
Prenuptial agreements can help to prevent businesses from being considered marital property in the event of a divorce. Alternatively, if the business is formed during the marriage, a postnuptial agreement can be utilized to clarify ownership of the business.
Generally, the couple will have three options in terms of how to properly divide their business interest in the event of a divorce. One option is for one party to buy out the other’s share. Another option includes both parties agreeing to sell the business to a third party. Additionally, the couple may opt to continue the co-ownership of the business
Properly Valuing A Business
Businesses are comprised of tangible assets, such as cash, inventory, and equipment, as well as intangible assets such as a company’s goodwill, trademark rights, and copyrights
There are many methods that can be used to properly value a business, including:
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The market approach: valuing the business by examining comparative businesses of the same industry and locale that have been sold
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The income approach: valuing the business by analyzing the current and anticipated earnings, while factoring in the potential risk of the earnings not being received
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The asset approach: valuing the business by placing a monetary value on the business’s assets and debts
The valuation of such assets can be extremely subjective, especially considering the different methods available. Because of this, each party should obtain separate counsel and experts to support their best interests.
Sources:
https://www.ilga.gov/legislation/ilcs/ilcs4.asp?ActID=2086&ChapterID=59&SeqStart=6000000&SeqEnd=8300000
