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What if you or your spouse owns a business or professional practice and you’re headed for a divorce? Assuming it was acquired, or increased in value, during your marriage, it may be the martial estate’s most valuable asset.  In that case, how is a business valued?  

Minnesota follows the concept of “equitable distribution” in a divorce. This means that your assets and debts are divided under the principal of “equity” as compared to states where assets are divided by who holds title, or community property states where all assets are divided equally. Under the principle of “equitable distribution”, the court divides marital property considering:

“all relevant factors including the length of the marriage, any prior marriage of a party, the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, needs, opportunity for future acquisition of capital assets, and income of each party” . . .  [and the court] “shall also consider the contribution of each in the acquisition, preservation, depreciation or appreciation in the amount or value of the marital property, as well as the contribution of a spouse as a homemaker.”

Minnesota Statute 518.58, subdivision 1. Generally, all assets and debts are divided equally, absent unusual circumstances, and this includes business interests.

How Is the Business Valued? 

Usually, a business or professional practice is valued by a business appraiser.  Often, the parties agree to one appraiser to provide a neutral evaluation, although each party is entitled to retain his/her own appraiser. There are three primary methods for valuing businesses.  First, there is the book value approach. Here, the value of a business equals the difference between the balance sheet values of its assets and liabilities. Second, there is the income approach. Here, the appraiser determines the expected cash flow using the business’s past earning and multiplies them by a capitalization rate which depends upon numerous factors including the age of the business, the strength of customer goodwill and industry volatility. Third, there is the market approach. This approach establishes the value by comparing the business to the sale prices of similar businesses which have recently been sold. Often, a business that has other owners besides the divorcing owner, has a buy-sell agreement, which can have a significant impact on a business valuation. Discounts are also considered in valuations, including “key person” and minority owner discounts.

When valuing a business, the appraisal does not take into consideration taxes that may be due on the sale of the business as these taxes may be considered too speculative.  Reducing the value of the business by the taxes that may be incurred in a future sale is often the subject of vigorous negotiation or litigation. Except in unusual circumstances, a business is awarded to one of the parties, and the other party receives his/her share of the business value in cash, or by receiving assets of equal value. For example, one party may be awarded the business, and the other party may be awarded real estate of similar value. There are many considerations that must be evaluated in a divorce where a business or professional practice is at issue.  The lawyer you choose should have substantial experience in this area.

Sources:

Minnesota Statute 518.58, subdivision 1.