No matter what, even in the best of circumstances, divorce isn’t easy. Ending one chapter of your life, especially a chapter as significant as a marriage, and beginning a new one is bound to have its share of stress and difficulty. This can be even more true if there are extenuating circumstances that make the divorce even more complicated. One such circumstance often involves two spouses who jointly own a business together, and then decide to divorce.
When someone owns a business, and they started that business when they were married, and then they go through a divorce, there can be several questions that arise, such as:
- Is the business considered marital or separate property?
- Will the couple sell the business outright?
- Will one spouse buy the other spouse’s interest in the business?
- Will the spouses continue to try and run the business together?
- How much is the business worth?
All of these questions are important, but the latter question is particularly important if the couple has decided to sell the business and divide the proceeds upon divorce. There will ultimately need to be an equitable distribution of the shares of the company as part of the property division process during the divorce. An essential step in dividing the business is first determining its value. The question, of course, is how exactly do you go about doing so?
There are a number of helpful steps to take, and information to consider as you begin this process:
- Enlist help from the right professionals: The first and most important step in valuing your business should include hiring a trusted team, both an attorney and a financial professional who understands business valuation – who can advise you as you go. The importance of doing so can’t be overstated. Having knowledge and experience on your side can take a great deal of the stress and anxiety out of the process, and can help to ensure that you don’t forfeit any of your rights, or overlook any important steps that may have significant legal and financial consequences later on.
- Gain an understanding of IRS Rule 59-60: What is IRS Rule 59-60? Essentially, it’s the IRS rule utilized to determine the fair market value of an asset. It sets forth the general approach to and methodology for valuing shares of a closely-held corporation. While it may seem intimidating and overwhelming on its face, the good news is that it can be broken down into more understandable bits and pieces.
- Familiarize yourself with the factors that appraisers may consider in determining the fair market value of your business: When your business is appraised, the appraiser will be seeking to determine the fair market value of your business. Generally, “fair market value” is considered to be the price that a buyer would be willing to pay, and a seller would accept in a free and competitive market, where both parties have adequate information and are acting in their own best interests. An appraiser will attempt to determine what that number is by considering a number of factors, including:
- The nature of the business and its history since it was created;
- The economic outlook in general and the condition and outlook of the industry;
- The stock book value and the condition of the business in financial terms;
- The company’s future earning capacity;
- The dividend-paying capacity of the company;
- If the company has intangible value or goodwill – essentially earnings in excess of a normal rate of return based on certain factors;
- The sales of the stock and the block of stock value;
- The market price of the stocks of the company.
- Consider two of the most commonly used valuation methods: While there are many ways to value a business, two of the most common methods include:
- The Book Value Method: The “book value” of a business is generally what the business claims that its assets are worth in its corporate books, and subtracting the value of any liabilities.
- The Market Approach: The market approach of valuation, in contrast to the book value method, looks not at the actual concrete value of the business in terms of assets and liabilities, but instead bases value on the estimated earning capacity of the business. Often, appraisers will consider the business’s income and the value of its assets over the most recent five-year period, and attempt to determine what the business might do over the next five-year period.
Which method to use may depend upon the nature of the business itself, as well as the personal preferences and experience of the appraiser involved.
Clearly, there is much that goes into valuing a business, and this process can vary in complexity depending upon the nature of the business itself, and on the unique circumstances of each couple. While it is our hope that this article provides helpful information to increase understanding of business valuation methods, it is certainly no substitute for consulting a knowledgeable financial advisor and an experienced attorney regarding your particular circumstances. Doing so will not only relieve your stress levels and provide peace of mind – it will ensure that the proper value of the business is determined. This will keep you from undervaluing (or overvaluing) your business and will ensure a feeling of confidence that you are making the right choices with respect to your financial future.
Call the Law Office of Dustin McCrary Today
If you are a business owner contemplating divorce, you will need an attorney on your side who knows and understands the complex law that may apply to your circumstances. At The Law Office of Dustin McCrary, we have the experience and knowledge that you will need as you confront the various issues that may arise during your divorce, both business and non-business related. We are here for you, and ready to help. Call us today. We look forward to helping you take the next steps toward a brighter, happier future ahead.