Marital property is property that was obtained or accumulated during marriage through marital effort or income. If you started a business after your marriage, the business is marital property. Mixed property is both separate and marital. If you started a business before marriage, the increase in value due to business efforts during the marriage is marital property. If you separate from your spouse, the marital value of the business will be calculated into the division of property and debt…equitable distribution. Yikes!
How to Value a Marital Business
A business owner and spouse may agree on the business’s value. If you cannot agree, then you may need to have the business appraised by an expert. The appraiser will investigate the assets (real property, motor vehicles, equipment, inventory, accounts receivable, and goodwill) and the liabilities (debts and accounts payable). The appraiser will use one or more approaches of valuation, including:
a. The income approach – calculating the expected economic benefit to the owner. In other words, the net present value of the benefit stream generated by the business.
b. A market or industry approach – comparing recently sold “like” businesses or using industry publications regarding values of like businesses.
c. An asset approach – the net value of all assets less the liabilities.
The appraiser may provide a “calculation of value” which is a snapshot valuation using one method. This will be the least expensive valuation. The “conclusion of value” is a more comprehensive and expensive valuation utilizing two or more methods to reach the value of the business.
Regarding valuation, be realistic and honest with yourself. Years ago, I was involved in a case in which the wife alleged her husband’s business was worth $120,000. The owner insisted the worth was $60,000. My review of the records indicated the wife was more in the ballpark, but the owner refused to compromise and wanted the business evaluated. The Court appointed an expert witness to appraise the business…it came in at $200,000.
Basically, the value that Courts like to arrive at is “the value at which a willing buyer would buy at and a willing seller be willing to sell at, neither being under compunction to buy or sell.” That is the buyer need not purchase the business and the seller is not under any stress to sell the business.
How Service Businesses Are Affected By
Service Businesses – sole practitioner lawyers, consultants, sales representatives, etc., may have little value or less value than other types of business due to their personal relationships with clients. If the business owner was no longer engaged with the business, the former client may not stay with the new owner, but rather, seek another business to perform the service. This creates a “key-person” discount, lowering the overall value of the business.
Is there a way to protect my business from equitable distribution?
Unless your spouse does not want his or her share of the value of a wholly marital business, there isn’t much an owner can do to prevent the marital business value from being calculated into the property distribution. However, an unmarried business owner can protect the business value if, before marriage, the parties enter into a prenuptial agreement that provides for the continuing separate nature of the business – despite marital effort.