Welcome to FreeDivorce.com.
Christina: This is Christina.
Ed: This is Ed. Today, are going to discuss basic issues when it comes to dividing an ownership interest in the family business. 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.
Ed: Christina, how does a couple that is getting a divorced deal with dividing an ownership interest in the family business?
Christina: 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.
Ed: If you don’t want to sell the business, what is another option?
Christina: 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.
Ed: What if I don’t want my spouse to be part of the business after we divorce? What if I want to have sole ownership of the business?
Christina: If one spouse wants to end up owning the entire business, you have to deal with the value of the business.
Ed: How do you figure out what a business is worth?
Christina: Most businesses own hard assets which have a value that 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.
Ed: Is the value of a business the total value of its hard assets minus all of its liabilities?
Christina: 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.
Ed: If a business is worth more than the value of its assets minus its liabilities, how do you determine its value?
Christina: 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 their 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.
Ed: Are these the only methods used to determine the value of a business?
Christina: 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. You can spend $5,000 to $10,000 to value a relatively simple business with clean books.
Ed: How long does it take for a business appraiser to determine the value of a business?
Christina: You can expect it to take several months for the appraiser to complete the appraisal. If the appraiser is an accountant and you request the appraisal during tax season, don’t expect your appraisal report to be done until after tax season.
Ed: What if the books for the business are not well organized or worse, not accurate?
Christina: 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.
Ed: What else should I consider when it comes to hiring an appraiser to put a value on a family business?
Christina: 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.
Also, 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.
Ed: Let’s assume my wife and I work in the family business and the business generates $200,000 per year in net income. We hire a business appraiser and the appraiser concludes, based on the net income the business generates, that the business is worth $1 million dollars. I borrow $500,000 and buy out my wife’s one-half ownership interest in the business. She is then unemployed. Do I need to be worried about spousal support?
Christina: Yes. You just paid your wife $500,000 for her half of the business income stream. If you are now earning $200,000 per year while your wife has little income, you may end up paying her a large percentage of your income in the form of spousal support.