Business Valuation in Divorce

Written by Yonatan Levoritz on December 28, 2024

Dividing assets during a divorce is complex, but what happens when one of those assets is a business? For many couples, this business might be their largest shared investment. Determining its value isn’t just about assigning a dollar figure—it’s about ensuring a fair property division. That’s why business valuation in divorce is such a critical component of the process.

At The Levoritz Law Firm, we help simplify business valuation for property division. This guide covers the basics, its importance, and the experts involved.

Why Are Businesses Valuated in a Divorce Case?

Businesses are valued in a divorce case to ensure equitable distribution of marital property. New York operates under an “equitable distribution” system, meaning property is divided fairly—not necessarily equally. If a business was started or grew significantly during the marriage, it may be considered a marital asset.

Determining the value of a business ensures that neither party is left with less than their fair share. This valuation is crucial for resolving various issues, such as selling the business and dividing the proceeds, buying out one spouse’s interest in the business, or allocating other marital assets to balance the business’s value

Without a proper valuation, asset division could feel arbitrary instead of rooted in legal and financial accuracy.

Who Conducts the Business Valuation During the Divorce?

A qualified financial professional, often a forensic accountant, conducts the business valuation. Divorce lawyers frequently partner with these experts to ensure the process is handled methodically and precisely.

Here’s who is typically involved:

• Forensic Accountants: These professionals thoroughly examine financial records to evaluate the business’s worth.
• Business Appraisers: Sometimes brought in for more niche market insights, appraisers specialize in methods specific to the industry sector.
• Tax Specialists: Often consulted to consider tax implications, which can significantly affect net valuation.

Business Valuation Methods

Professionals use several approaches to determine the value of a business during divorce.

Income Approach

The income approach values a business by predicting future earnings and using financial analysis to estimate cash flow or profits. It’s ideal for businesses with strong, stable revenue.

However, business owners sometimes adjust financial statements to minimize tax liabilities, which can artificially reduce the business’s reported earnings. These adjustments must be accounted for during valuation to reflect the company’s financial health.

Assets Approach

The assets approach calculates a business’s net worth by subtracting liabilities from its tangible and intangible assets, such as equipment, inventory, patents, or trademarks. It is ideal for asset-rich businesses that are less focused on profitability.

Market Approach

The market approach determines value by comparing the business to similar recently sold companies. It’s much like comparing home sales in the same neighborhood. This method is standard for businesses in competitive, well-defined markets where accurate sales comparisons are available.

Private business valuations are harder since financial data isn’t publicly available, requiring expert estimates.

Does Business Valuation Include Assets?

Yes, business valuation includes assets as a key component for determining value. Both tangible and intangible assets contribute to the overall worth of the business.

Tangible assets include items such as office buildings or real estate, equipment, tools, machinery, and physical inventory or stock. On the other hand, intangible assets encompass elements like brand reputation, intellectual property such as patents or trademarks, and client contracts or goodwill.

How is a Business Valuated Differently from a House or a Stock Portfolio?

The valuation of a business is more complex than valuing a house or stock portfolio because of its unique attributes.

• Houses are typically valued based on appraisals, which focus on comparable sales, structure condition, and location.
• Stock portfolios have readily available market values, and their worth is often determined by looking at daily performance on the stock exchange.

Unlike stocks and real estate, selling a business is more complex due to a smaller buyer pool and longer due diligence periods.

Why is it Important to Have a Divorce Lawyer on Your Side in a Valuation Process?

An experienced divorce lawyer is essential for ensuring the valuation process is accurate and just.

Here’s how a lawyer strengthens your case:

• Expert Coordination: A skilled attorney brings in the right financial professionals to assess the business.
• Clear Communication: They can explain intricate valuation methods in ways that make sense for you as the client.
• Fair Representation: If disputes about the valuation arise, your lawyer can negotiate or litigate to ensure you receive your rightful share.

At The Levoritz Law Firm, we protect our client’s interests during property division, including business valuation in divorce cases. Contact us at (718) 942-4004 for a consultation and secure your financial future.