Divorce is profoundly impactful on everyone involved, but for business owners, it can also spell the beginning of financial and professional troubles.
This is especially a concern when it comes to property division. The business is often the largest asset on the table, and how it is evaluated during the divorce process can affect its long-term viability.
If one party is an owner, shareholder, or partner of a closely held business, they must anticipate potential entanglements and be prepared to address them to preserve the business post-divorce.
What kind of business valuation is optimal?
Utah is an equitable division state, meaning assets are divided equitably between the divorcing parties. How marital assets and debt are split depends on a number of factors. The court will decide what is a fair, but not necessarily equal, division of property. Having said this, the longer the marriage lasted, the more equal the split is likely to be.
When it comes to the valuation of a business interest, the valuation method used, as well as the business’s organizational structure, will affect the outcome. The choice of business valuation usually comes down to one of three methods:
- Assets against liabilities, which can be complicated for small businesses when considering large expenditures such as vehicles, computers, office equipment, and other inventory;
- Market-based analysis, which provides data on similar businesses that have been bought or sold to determine market value and is least often used for small to mid-sized businesses; and
- Revenue-based valuation, both past and projected, focusing on cash flow and profits to determine future value, including proceeds from investments.
Are there other factors that can affect valuation?
The structure of the business can influence how it may be divided in divorce. In a sole proprietorship, the business will often be divided equally. However, in a corporation where shareholders receive dividends, the portion subject to division may be different.
Business owners are often advised to have a prenuptial agreement going into marriage, or even a postnuptial agreement during the marriage, to define their spouse’s financial stake. Even if the business started before the marriage, the non-owning spouse will generally have a claim if the business continued operations throughout the marriage and/or they contributed in non-financial ways, such as by raising the children and maintaining the household so the other spouse could focus on the business.