A spouse’s interest in a business is often considered a marital asset, even if one spouse started it before the marriage. A spouse could own a business entirely, or they may have an ownership interest in a company with other shareholders or partners. Either way, the overall business, or the spouse’s share in the company, needs to be valued before the divorce can be finalized. Maryland law divides marital assets using principles of equitable distribution. This holds true for ownership of a business too when it is a marital asset.
The attorneys at Brodsky Renehan Pearlstein & Bouquet represent clients in family law matters. We have extensive experience in handling difficult matters, such as when a business is involved because family law is all we do. Contact us today to learn how we can help you.
Any Business Interest Needs to Be Valued in a Divorce
If the spouses jointly own the business, it is often not practical for two ex-spouses to continue in business together.. If the spouses cannot continue in the business together than one or the other spouse is going to want the value of their interest. .
Each spouse would have their own competing interests when it comes to valuing a business. The one who would continue to own the business would argue that the business has a lower value because it would mean that they pay less. The spouse who is being paid takes the position that the business is worth more because it would mean more money for them.
How Businesses Are Valued in a Divorce
Both parties would hire their own valuation expert to place a value on the business. The standard of value in Maryland is “fair market value”, defined as the price a willing seller would pay to a willing buyer, with neither party under a compulsion to sell or buy. If there is a company involved, you would need to support your own position as to value, regardless of whether you are negotiating a divorce agreement or litigating your case in court.
There are numerous ways to value a business – book value, comparison sales approach or income approach. The type of business often dictates the methodology of value. Each method could result in a different valuation for the business. On top of that, you have other intangibles that are a part of the balance sheet, such as goodwill, both personal and institutional. There is not necessarily one right answer for how to value a business. In fact, one Maryland court has said that valuing a closely-held business in a divorce is “not an exact science .”
How Maryland Courts View Business Valuation
The legal standard that Maryland courts use to value a business is fair market value. This term is generally defined by the IRS as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell.”
Methods for Valuing a Business
There are three possible methods for valuing a business, each of which could result in a different valuation:
- The income approach values the business based on its future earnings
- The asset approach values the business based on its current balance sheet
- The market approach uses recent sales of similar business to provide the valuation
Even when two experts use the same valuation method, there is significant room for different opinions. For example, they could differ on the future earnings when using the income approach or which businesses are comparable when adopting the market approach.
There is no set formula, and you may not have much guidance. What you have is an attorney who can work with a business valuation expert to come up with a number for the business’ value.
Working with Qualified Expert Witnesses
Business valuation is almost always a “battle of the expert witnesses.” Each party’s attorney will hire their own expert witness to reach their own conclusions on valuation. It is common for each expert to reach starkly different conclusions. While these differences are sometimes a starting point for negotiations, a judge may also be asked to choose between two competing realities.
A court has a considerable amount of discretion in whether to accept an expert witness’ testimony about the valuation.
Therefore, you should hire an attorney who can work with qualified experts to present the most persuasive argument possible. At Brodsky Renehan Pearlstein & Bouquet, our attorneys routinely work with expert witnesses in contested and negotiated divorces to support your arguments for complex issues. We work with forensic accountants and business valuation experts in difficult cases, including those with novel issues not yet considered by courts.
Valuing Goodwill Presents a Particular Challenge
In addition to the physical assets and earnings, a business or the owner may have earned goodwill over time. Goodwill could come from the likelihood that customers would come back for repeat business, or things such as a business’ location. Goodwill is one of the more difficult things to value on a business’ balance sheet.
Maryland courts generally consider goodwill to be a part of the marital assets (except for the personal reputation of the owner). After all, the business owner has built their business over time during the marriage. However, Maryland courts have wrestled with the issue of valuing goodwill, including whether an owner’seputation should be a part of the goodwill valuation . It is difficult for judges to put a definitive dollar value on something that is inherently intangible.
Businesses May Be Part Marital Assets and Part Non-Marital
Another issue involved in valuing a business is determining how much of it is marital property. One spouse may have owned the business, entirely or in part, before the marriage.
The business may have increased in value over the course of the marriage. In this case, part of the business would be not considered marital assets, while the appreciation in the value is. The other spouse would be entitled to their share of the increased value of the business.
However, it is not always easy to determine exactly how much the business was worth years ago before the marriage. Again, there is significant room for dispute between the two spouses.
Contact a Maryland Business Valuation Lawyer Today
These are just some of the issues involved with business valuation. These cases can present some of the greatest complexities in a divorce matter. The attorneys at BRP Family Law can spot issues and deal with novel questions that arise. If you are in a divorce where a business is involved, you need to get legal help early in the process because your lawyer needs time to be as precise as possible. Otherwise, you can end up in a difficult legal position. Contact us today to speak with one of our attorneys.