An Overview of Business Valuation and Division in Divorce
October 13, 2022 | Jason C. Brown
Business owners face a unique set of challenges as part of a divorce. The valuation and division of business interests can be complex and stressful.
At a fundamental level, understand that a business is an asset of its owner. Minnesota law provides that the assets of the parties to a divorce are divided in an “equitable” manner. That almost always means equally.
Minnesota law also recognizes that if a party to the marriage brings an asset into the relationship, the asset likely has a nonmarital component that is not subject to division. If the value of the nonmarital business grows during the marriage, the increased value is considered marital.
The key to determining the significance of business ownership often rests in the value of the business itself. Naturally, the more valuable the business, the more attention it receives.
Business valuation is as much art as science. Our family law group works with the more reputable business appraisers in the Twin Cities. These experts typically invoke one of three methods to offer an opinion as to the market value of a business: (1) the balance sheet approach; (2) the multiple of profits approach; and (3) valuation based on comparable business sales.
Valuation of a business using a balance sheet approach is relatively straightforward. The appraiser will examine the assets of a business, less its liabilities, to determine market value. Businesses with an inventory of goods to be sold, or real estate, fit well within this methodology.
In other cases, the “multiple of profits” approach to valuation proves useful. Suppose a willing investor wishes to receive a 20% return year over year. Small businesses come with significant risk of failure, so the risk/reward must be accounted for. That said, businesses are often valued at five times annual profits. Of course, that ratio varies from industry to industry. “Profits” tend to involve funds realized by the owner after payment of all expenses in a given year, including a reasonable wage for themselves.
Finally, a business appraiser can access records relating to the sale of other similarly situated businesses – much like a real estate appraiser examines comparable properties. That data can reflect general market trends and serve as a baseline assumption of value.
Once the value of a business is obtained, the parties and lawyers are left to determine how to account for it in the context of the overall property settlement. In some cases, there are other assets of value that can be awarded to the party relinquishing their interest in the business as an offset. In others, the party keeping the business may take out a loan and compensate the other for their interest. A third option involves two divorce litigants remaining business partners after the dissolution of their marriage.
Are you a business owner? Is your spouse a business owner? Are you facing divorce? The corporate and family law attorneys with BGS are here to help.