4 Factors to Help You Value a Business During a Divorce

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By Dane E. Leitner

Generally, people in Florida have an understanding that if you get divorced, there is a premise that the marital assets and liabilities will be distributed equally unless there is a valid basis for an unequal distribution.

However, a common question is:

What is my equal value of a business that was formed by only one spouse during the marriage?

If only one spouse is involved in the business, the other spouse likely thinks that the business is worth a lot more than it really is.  And the spouse that is involved in the business is most likely proud of its financial stability any other day, but come time for divorce, all of a sudden it’s a business that is worth nothing.

Below are four common factors to consider that may help in calculating your business valuation or come into play during your divorce proceedings:

 

  1. Evidence

Any distribution of marital assets or liabilities must be supported by competent, substantial evidence.  Thus, it is important that each party obtain all relevant documents regarding the financials of the business and then present testimony of the valuation so the court can evaluate the evidence and make the necessary findings.

 

  1. Fair Market Value

Valuation of a business is determined by the fair market value of the business, which is the amount a willing buyer and a willing seller would exchange assets absent duress.

A par value—the value of an instrument or security as shown on its face, such as the arbitrary dollar amount assigned to a stock share by a corporate charter or for capitalization—is not sufficient to value the business.  A court must consider the other items such as the value of goodwill, along with the assets and liabilities of the business, when calculating the fair market value.

Enterprise goodwill is defined as the value of a business which exceeds its tangible assets and represents the tendency of clients/patients to return to and recommend the practice irrespective of the reputation of the individual practitioner.  Enterprise goodwill is a marital asset, subject to equitable distribution, and is considered when valuing a business.

With enterprise goodwill, people go to a particular business not necessarily because of a particular person, but rather because of the business itself.  So, for example, people may frequent a car dealership for mechanic work and not because of any particular mechanic, so even if a mechanic leaves the dealership, customers will continue to patronize the dealership for their service, reputation, pricing, etc.

However, personal goodwill is not.  Personal or professional goodwill is attributable to the skill, reputation, and continued participation of an individual.  With personal goodwill, the business would likely only continue because of a specific person/spouse.  An example is a general medical practice with several doctors, but some patients only go to the practice because of a specific doctor.

Personal goodwill is not a marital asset, and is not considered when valuing a business.  If a spouse is calculating the value of a business, they cannot consider the other spouse’s personal goodwill as it will not continue to exist when that spouse leaves.

 

  1. Timing

Additionally, the valuation will depend on the date that is used to value the business. The date for determining the value of marital assets and the amount of marital liabilities is the date the court determines is just and equitable under the circumstances.

Timing of your valuation is an important consideration as a business could be doing great for a few months/years, and then do poorly for some months/years.  If getting divorced and the business is valued high at the very beginning of the case, but then starts to perform poorly due to market factors, this could be damaging to a spouse having to pay for the increased value that no longer applies.

 

  1. Hire An Expert

The owner of a business can testify to its value, given their personal knowledge of the business, without hiring an expert.  However, it is beneficial—if financially feasible—to hire an expert to help determine the value of a business in a divorce.  Look for reputable and credentialed accountants or appraisers in your area, as this may impact the outcome of a valuation.

It is also important to retain legal counsel that is familiar with business valuations, as they can demonstrate the necessary evidence to the court to assist the court in determining a fair and equitable valuation of the business.

 

Born and raised in South Florida, Dane E. Leitner concentrates his practice in the areas of civil litigation, family and marital law, and condominium and homeowner association law.  If you have questions regarding business valuation or any other divorce matters, contact Dane at dleitner@warddamon.com or call (561) 842-3000.

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