How to Value a Business in a Divorce
Missouri family law states that most assets acquired during a marriage are marital property, which is subject to division in a divorce case. If either spouse owns a business, all or part of their ownership stake in that business might be marital property. How do you value a business in a divorce in Missouri? The following is an overview of how to determine whether a spouse’s ownership of a business is marital property, and how to determine the value of the marital property portion. If you have questions about valuing or dividing a business in a divorce, a family attorney can tell you more about what to expect.
Types of Business Ownership
How to value a business in a divorce depends on many different circumstances. Before you can determine whether a spouse’s equity in a business is marital property, it is worthwhile to address the various ways a person can “own” a business.
An individual can go into business for themselves without any formal business structure. This arrangement is often known as a sole proprietorship. If two or more people start a business without a formal structure, they create a general partnership.
Formal business structures in Missouri include corporations and limited liability companies (LLCs). A person can form these kinds of entities by filing paperwork with the Missouri Secretary of State. Unlike sole proprietorships and general partnerships, corporations and LLCs exist as distinct legal entities separate from their owners.
Sole proprietorships and general partnerships can present complicated situations in divorce cases. Since these types of businesses do not exist as separate entities, all of their assets are owned by the business owner, either in their own name or an assumed business name.
Corporations and LLCs, on the other hand, hold assets in their own names. The business owners’ only assets are their shares in a corporation or their equity in an LLC.
Separate vs. Marital Property
The timing of the creation of a business is important when valuing a business in a divorce. If a spouse started the business after getting married and used money from their joint account, their equity in the business is almost certainly entirely marital property. If, however, they already had the business before the marriage, all or part of it might be separate property.
Suppose, for example, that a spouse started their business as a corporation several years before getting married. They invested $5,000 into the business and owned 100% of the shares. A few years after getting married, they put in more of their own money and received more shares. They still own 100% of the business, but now some of their shares are marital property.
Family Business in Divorce
Particularly complicated issues can arise in divorce cases where the spouses have started a business together. The difficulties tend to come with dividing a family business, though, rather than valuing one.
Valuation of a Business
On the simplest possible level, a business’ value is the value of its assets minus its liabilities. Business valuation in divorce is never quite this simple, though, nor should it be so simple. It might involve analyses of a business’ cash flow, market share, and other features. A business with a large cash flow or significant growth potential could have a higher value than a balance sheet might suggest.
An accountant or other financial professional can assist with these aspects of business valuation. They may use one of three possible approaches:
- Market: This attempts to determine the fair market value of the business.
- Asset: This uses the formula described above (assets minus liabilities) to determine a business’ net asset value.
- Income: This determines a value for the business from its ability to generate income.
The income approach is probably the most common in business valuations since cash flow is a fairly easy metric to determine. The asset method often fails to take important factors like growth potential into account. Market value tends to be more difficult to determine for a business than for assets like real estate. The best way to arrive at a fair valuation of a business, though, is to use a combination of several methods.
Valuation of the Part of the Business You Own
The above analysis can help determine how to value a business in a divorce. If the spouse is the only owner, that is the end of the process. If the business has other owners, though, you will still need to know what part of that value actually belongs to the spouse.
This process can be fairly straightforward, such as when a spouse owns five hundred shares in a corporation that has issued a total of two thousand shares, or when they own 25% equity in an LLC. Dividing a business partnership without a formal legal structure can be more complicated, but a spouse’s ownership stake can still ultimately be expressed as a fraction or percentage.
Once you know what portion of a business the spouse owns, valuing that portion is easy. If a spouse owns 25% of a business valued at $100,000, their business equity is worth $25,000.
Mark A. Wortman is a Kansas City family lawyer who focuses his practice solely on divorce and other family law matters. Please contact us online or at (816) 523-6100 today to schedule a confidential consultation to discuss your case.