When one or both parties divorce, the value of the ownership interest in a privately held company must be evaluated for property division purposes, while the value of a share in a company that is publicly traded is known due to stock market pricing, assessing the value of a stake in a family-owned or closely held business is more difficult.
A business valuation is one way to determine the worth of an ownership interest in a privately owned business. While a company valuation engagement may be required in many cases, it can often be a time-consuming procedure and an additional client expenditure that may not be required in every divorce case. However, when the business is a major component of the marital property, a divorce attorney should assess various factors to decide if a business assessment is required. Talk to a business valuation consultant today to learn more.
Marital vs. nonmarital property
One of the first steps in determining if a business valuation is required is determining whether the firm or ownership interest in it is nonmarital or marital property. Nonmarital property is not subjected to equitable division. Hence valuing the business stake is unnecessary. The business may be considered nonmarital property if:
- The company was founded before the marriage date.
- Nonmarital funds were used to purchase the business.
The company is most likely marital property if:
- The company was purchased during the marriage.
- The business was funded with marital funds.
- During the marriage, either spouse made considerable labor-related contributions to the business.
When a business is classified as marital property, the attorney must analyze the many ways to determine its value.
Ways to assess business value
Even if the business is considered marital property, clients can avoid the expense and time investment of a business valuation if the value of the business interest can be assessed in another way. Consider the following options:
- The parties may agree upon the value.
A business appraisal is not required if the clients are friendly and can agree on the value of their ownership interest. However, during divorce cases, the business is often a major source of income for the family or a considerable piece of the parties’ marital estate. The value of the business interest is a huge source of contention.
- Attorney or client estimated value.
If the nature of the business is straightforward and exclusively reliant on tangible assets, the lawyer or client may be able to assign a monetary value to it.