Business Interests During Divorce

You started from scratch. You decided to forge your own path. You put in the time, effort, and money to start your own business. Finally, your efforts paid off. You built a successful business.

Now that you are looking into divorce, you’re stressed. Divorce is scary. You’ve read about marital versus separate property. Now you’re left wondering, how much will my business be valued at? How much of my business can be divided?

What is the value of my business?

Business valuation can be a very complex process. Many things go into valuing a business during a divorce. The type of business, whether it has been growing or shrinking, the industry, whether one or both parties work in the business, etc. all play a role in determining the value of the business.

Even if you keep pristine books, several factors go into the valuation of your business. For example, how long have you been in business? What is your competition like? Is your business trending upwards? Can your business continue without you? Are you taking a reduced salary to put money back into the business? The answers to all of these questions will affect your business’ value.

There are three different generally accepted valuation approaches. These are used by accredited business valuation experts. In a Colorado divorce, you can either have a joint valuation expert or a retained/”shadow” expert.

Market Comparison

The market comparison approach (also called the comparable sales method) looks at other sales of similar businesses. Using this approach, an expert will attempt to value your business based on what similar businesses have sold for. This approach is commonly used in real estate. If your company focuses on managing real estate, a market comparison may be the best approach to value your business.

Asset/Liquidation Approach

The liquidation approach (also called the asset approach) uses a specified date to determine a hypothetical total liquidation value. This approach may result in a lower value than an approach that assumes the business will continue operating. A company may have assets that are very valuable if the company stays in business, but are worthless if the company goes out of business. This approach is relatively straightforward, but is rarely employed in divorce valuations.

Income Approach

The income approach looks at the potential future income of the company. An expert using this approach will likely use different methods such as excess earnings, discounted cash flow or capitalization of earnings. A capitalization factor reflects what an investor would see as a reasonable rate of return when accounting for interest rates and the risks of the business. This approach can apply to a wide variety of industries.

Goodwill

Goodwill is the intangible value of a business. For example, if you own a landscaping company and are known as the go-to landscapers in your area, that reputation has value. Goodwill is also common in professional practices, like doctors, attorneys, accountants, etc.

Goodwill is an asset that the court can divide. Determining goodwill can be difficult. Oftentimes, experts will start with how much money the business owner earned. An expert will then look at what a reasonable salary for someone with similar qualifications would be. Then the expert will look at how much the business’ assets are worth. That can determine the amount of goodwill.

To put that into practice, let’s say that you earned $250,000 last year. An employee with similar qualifications would make $100,000. Your business’ assets are worth $100,000. This would mean that your business has about $50,000 in goodwill because you earned $50,000 more than a reasonable salary plus the assets of your business.

It is critical to get an accurate value of your business’ goodwill as it can dramatically affect the value.

How much of my business is at risk?

Now you know how much your business is worth, but how much of your business is at risk during divorce?

If you started your business before your marriage, you may be thinking that you’re in the clear. Unfortunately, that is not the case. In Colorado, if you started your business before your marriage, any increase in business value during the marriage is subject to division. For example, if your business was worth $500,000 when you married your spouse and your business is now worth $1,500,000, the $1,000,000 increase in value is marital property.

Beware of the Double-Dip

Your business can be treated as an asset, and as income. This is critical, as your spouse may not be involved in your business and may want nothing to do with it. In that case, you might consider doing a lump sum payment or increasing the amount of spousal maintenance, instead of giving up any business interests.

Co-Owned Businesses

If you and your spouse own a business together, things get more complicated. Frequently spouses do not want to remain in business together after a divorce. It is against public policy in Colorado for spouses to co-own property, including a business, after a divorce under In re Marriage of Paul. In this situation, negotiating a buy-out to get you or your spouse out of the business is probably the best approach. Making sure you have an accurate business valuation is key to determining how to proceed.

Discounts

To get an accurate valuation of your business, you need professionals with experience. At Kalamaya | Goscha, our divorce attorneys excel at valuing businesses to give our clients an accurate picture of what their businesses are worth. We know which experts to use to get an accurate value to go forward in your divorce proceeding.