The Family Law courts are open and so are we.

The Family Law courts are open and so are we.

The Family Law courts are open and so are we.

Business valuation during divorce

| Jun 8, 2021 | Divorce |

As property division is one of the more hot-button parts of ending a marriage, the subject can become even more emotionally fraught for the business owner whose focus is on ensuring the future of the business after divorce. As it is often the largest asset on the table during divorce proceedings, assessing the value of the business as well as any portion thereof that can potentially be split will affect its future longevity.

Michigan is an equitable division state, which means that the judge will apply a number of factors in deciding what is fair in the division of marital property for each individual case. Marital property consists of all property acquired during the marriage as well as debt, while pre-marital property includes assets such as a business, gifts or inheritances, or debt such as college loans, that either or both spouses brought into the marriage.

Completing a business valuation during divorce

For the Michigan business owner, the valuation of a business interest depends on the method used to assess it. Aside from its organizational structure, three basic ways of evaluating a business interest are:

  • Valuation of assets against liabilities. This approach can become complicated, especially for small businesses when assessing not only the big expenditures such as vehicles or computers, but also office equipment or inventory.
  • Valuation based on market analysis. This method is least-often used, as it can be challenging for small and medium-sized business owners to find similar businesses that have been bought or sold to determine the market value of the business during divorce.
  • Valuation of assets based on revenue, both past and projected. This method focuses on cash flow and profits to determine future valuation, including any investment-related proceeds.

Other considerations that affect valuation

Even if the business was started before the marriage, the other spouse may very well have an interest in it, especially if marital assets were commingled to finance the business or if the non-owner spouse owned shares or contributed in non-financial ways, such as in maintaining the household or raising the children while the other spouse focused on the business.

Business structure also determines in part how a business may be divided in divorce. In a sole proprietorship, for example, the business will be divided equally, but for a corporation where shareholders receive dividends, the portion subject to division will be different.

For metro Detroit business owners going through divorce, having specialized legal counsel to assess how the business is evaluated during divorce is essential to ensuring its future viability post-divorce.