If you and/or your spouse own a business that generates a substantial amount of income, you probably should not be trying to do your own divorce, but should instead be talking to a mediator or a lawyer. The following is some very basic information about the division of a business.
How do you divide a business?
One simple option may be to sell the business and divide the proceeds. However, if you sell the business, that may put you or your spouse out of a job and that may trigger issues about spousal support and child support. Another option may be to agree to continue to co-own the business and divide the net income after paying the spouse that runs the business a reasonable salary. If you both work in the business and you and your spouse can continue to get along after the divorce, continuing to co-own the business may be a good option. Usually, after a divorce, one spouse is going to end up owning the business. If one spouse is going to end up owning the business, you have to deal with the value of the business.
Most businesses own hard assets which have value everyone can easily understand. Examples of hard assets would include cash in bank accounts belonging to the business, accounts receivables, office equipment, office furniture, vehicles owned by the business; tools owned by the business, etc. Most businesses owe debts or obligations that again, are relatively easy to understand. Examples would include accounts payable, bank loans made to the business, lease obligations, etc. The value of a business is more than just the total of its hard assets minus its liabilities. Sometimes, the value of the net assets is a very small part of the total value of the business. The element that can be much more important than the net value of the business assets is the amount of income the business generates. Some extremely valuable businesses own little in the way of assets, but generate a lot of income.
There are many different methods for valuing on a business. Some of the more common methods are the following:
- Comparable Sales method: Some types of businesses are frequently bought and sold. You can look at recent sales data for your geographic area for businesses that are comparable to your business. This is like determining the value of your house by looking at the amount similar homes in your neighborhood recently sold.
- Multiples of gross revenues method: Many businesses are bought and sold using a multiple that is applied to its gross revenues. For example, the value of a particular fast food restaurant may be determined by multiplying its gross sales revenues by a certain percentage.
- Discounted cash flow method: You attempt to project the cash flow that the business will generate over a certain period of years and then discount that cash flow to a present value.
There are many more methods for valuing a business. If you want to know the value of your business, you can hire an experienced professional business appraiser. The business appraiser will likely employ several different business valuation methods before reaching a conclusion as to the value of the business. You can expect to spend thousands of dollars hiring a professional to appraise a business ($5,000 to $10,000 for a relatively simple business with clean books). You can also expect it to take some time for the appraiser to complete the appraisal, particularly if the appraiser is an accountant and you request the appraisal during tax season.
How long it takes to value a business, how expensive it is to value a business, and how accurate the valuation turns out to be will depend on how complete and how “clean” the financial records are. If you don’t keep adequate financial records for the business that accurately reflect the true income and true expenses of the business, then it may be difficult or impossible for an appraiser to determine an accurate value.
If you and your spouse decide to hire a business appraiser, make sure the appraiser understands that they are acting on behalf of both of you, as a neutral expert, to come up with the true value of the business.
Whether or not it is worth hiring an appraiser may depend on what amount of income the business is generating. If your spouse operates a business and the business generates very little in the way of income, it may not make sense to spend thousands of dollars on a business appraisal. If the business loses money, it may have a negative value.