If someone owns a business and intends to divorce, the organization will likely prove to be a significant roadblock to a smooth divorce process. The business may represent an investment of thousands of dollars of marital property and also likely serves as a source of income for one or both of the spouses.
In addition to determining how the company will operate after the divorce, there will often be conflicts about what the business is worth and how the divorcing couple will share that value. The valuation process is, therefore, key to obtaining a fair and reasonable outcome in a divorce involving a family-owned business.
There are typically two approaches to business valuation based on how the parties involved establish its value. These are some of the reasons why many people preparing for divorce use a going concern premise of value approach when determining what their company is worth rather than a liquidation approach.
Liquidation means preparing to close the business
When one of the spouses relies on the company for ongoing income, liquidating or closing down the company likely won’t be the best solution for sharing its value. Particularly in scenarios where the party owning and running the company will provide spousal or child support after the divorce, keeping the organization solvent may be a top priority for both spouses.
Using the going concern evaluation method means treating the business as though it will continue to operate. This is very different from the liquidation approach in which people place a value on the company based on the likely future sale of the organization or its assets. The goal of the going concern approach is to fairly establish what the company is worth for the purposes of property division proceedings while helping to ensure the company remains operational even after the divorce process.
Disagreements about value can quickly complicate the divorce
Finding the right approach to business valuation is crucial for someone who either wants to receive their fair share of marital assets in a divorce or protect their most valuable resources during negotiation or litigation. When people expect to continue operating a business and relying on the income it generates to support their families, the going concern valuation approach is typically a better option than a liquidation approach. Occasionally, spouses will need to justify the way they value the business as they negotiate or prepare for court.
Seeking legal guidance and employing an informed approach when addressing particularly valuable marital assets will benefit both spouses during a high-asset divorce.