Business Valuation in Divorce

Business Valuation Services in Divorce

Our business valuation and related financial services in divorce matters may include:

• +Valuation of closely held businesses and ownership interests
• +Forensic accounting and tracing analysis involving business interests
• +Review and rebuttal of opposing valuation analyses
• +Financial discovery, mediation, deposition, and trial support

The scope of each engagement depends on the business, the ownership interest, the available financial records, the issues in dispute, and the applicable legal framework.

Key Valuation Issues in Divorce

Business valuation in divorce can involve issues beyond determining the value of the company as a whole. The analysis may require consideration of the applicable standard of value and valuation date, the specific ownership interest, personal goodwill, owner compensation, and the extent to which the business or changes in its value are relevant to the marital estate.

Standard of Value

Every business valuation is performed under an applicable standard of value, which reflects the specific premise and assumptions under which the business or ownership interest is valued and can significantly influence the valuation methodology and conclusion. The applicable standard of value may vary depending on the jurisdiction, purpose of the valuation, governing law, and any relevant agreements. Common standards of value include fair market value and fair value.

Fair market value is among the most commonly applied standards and is generally defined as the price at which a business or ownership interest would change hands between a hypothetical willing buyer and willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. Fair value is a distinct standard, often defined by statute or case law, that may differ from fair market value in the treatment of valuation discounts, such as those for lack of control or marketability, or in other assumptions applied to the analysis. Other standards, such as investment value, may be relevant in particular circumstances.

The applicable standard of value in a divorce matter is generally established by statute, case law, and the facts of the matter, and it may differ from the standard applied for other purposes, such as financial reporting, tax, or transactional matters. Counsel determines the applicable standard of value; we apply that standard throughout the valuation analysis, including in the selection of methodology and the evaluation of any applicable valuation discounts or premiums.

Valuation Date

The valuation date establishes the point in time as of which the business is valued and the financial information, market conditions, and other circumstances relevant to the analysis are assessed. Because value can change meaningfully over even a relatively short period, the applicable valuation date can significantly influence the analysis and conclusion.

The applicable valuation date varies by jurisdiction and the facts of the matter, and may be the date of marriage, the date of separation, the date a petition or complaint was filed, the date of trial or hearing, or another date specified by statute, court order, or agreement of the parties. Some jurisdictions apply a single valuation date to the entire marital estate, while others permit different dates for different assets or give courts discretion in selecting the applicable date.

Information available, or reasonably knowable, as of the valuation date is generally considered in the analysis, while subsequent events that were not reasonably foreseeable as of that date are typically excluded. Where a business was owned before the marriage, or its value may have changed significantly during the marriage, more than one valuation date may be relevant, such as valuing the business as of the date of marriage and again as of the applicable valuation date, in order to assess any increase in value during the marriage.

Counsel determines the applicable valuation date or dates; we perform the valuation analysis as of the date or dates specified, applying the financial information and market evidence relevant to that point in time.

Marital and Non-Marital Business Interests, Growth, Tracing, and Reimbursement

The value of a business and the portion of that value included in the marital estate are separate considerations. A business may have been formed or acquired before or during the marriage, received by gift or inheritance, or funded with a combination of marital and non-marital resources. Its value may also change significantly over the course of the marriage.

How the business and any increase in its value are treated varies by jurisdiction. Depending on the applicable legal framework, relevant financial considerations may include when and how the business was acquired, the source of funds contributed to the business, a spouse’s efforts and compensation, and changes in the business’s value over time.

A business or professional practice owned by a spouse before the marriage is often treated as separate, non-marital property in many jurisdictions. However, any increase in the value of that business during the marriage may be includable in the marital estate, in whole or in part, depending on the applicable legal framework. Some jurisdictions distinguish between active appreciation, resulting from a spouse’s efforts, reinvested earnings, or marital funds or labor contributed to the business, and passive appreciation, resulting from market conditions or other factors unrelated to either spouse’s efforts. Identifying the incremental increase in value typically requires valuing the business both as of the date of marriage, or acquisition if later, and as of the applicable valuation date, with the resulting difference then analyzed under the applicable legal standard to determine what portion, if any, is includable in the marital estate.

A business formed or acquired during the marriage is generally presumed to be marital property in many jurisdictions, reflecting the time, effort, and resources invested during the marriage. That presumption may be rebutted, in whole or in part, where the business was funded or capitalized with separate assets, such as an inheritance, gift, or premarital funds, in which case tracing may be necessary to identify and quantify the separate contribution. Even where a business is treated as entirely marital, understanding how it was funded and how its value developed over the marriage can be relevant to related issues, such as reimbursement claims and the overall division of the marital estate.

Tracing may be necessary to identify the source and movement of marital and non-marital funds. This analysis may include capital contributions, acquisition funding, shareholder or member loans, distributions, and transfers involving the business, its owners, or related entities. That work is described in detail on our forensic accounting in divorce page.

Counsel determines the legal classification of property and any entitlement to reimbursement. We assist by tracing financial activity, analyzing changes in business value, and quantifying contributions or other amounts relevant to those determinations.

Personal vs. Enterprise Goodwill

Goodwill can be a significant component of value in closely held businesses and professional practices, particularly where the business depends heavily on the reputation, relationships, skills, or efforts of an individual owner.

Some jurisdictions make a distinction between enterprise and personal goodwill. From a valuation perspective, enterprise goodwill generally refers to goodwill associated with the business that may continue independently of a particular individual. Personal goodwill generally refers to value associated with an individual’s reputation, skills, relationships, or efforts that may not transfer with the business. The legal treatment of personal and enterprise goodwill varies by jurisdiction.

Where the distinction is relevant, our analysis may consider factors such as the business’s dependence on the individual owner, customer and referral relationships, management and workforce depth, business systems and processes, brand or trade name recognition, contractual relationships, and the extent to which customer relationships and other sources of goodwill are transferable to a new owner.

Owner Compensation and Normalization Adjustments

The reported earnings of a closely held business may not reflect its ongoing economic performance. Owner compensation may differ from market-based compensation for the services performed, and reported results may include personal, nonrecurring, discretionary, related-party, or other items that are not representative of ongoing operations.

Where appropriate, we evaluate normalization adjustments to develop a more representative measure of the business’s earnings for valuation purposes. These adjustments may increase or decrease earnings and are based on the specific facts of the business and available financial and market evidence.

Ownership Rights and Valuation Discounts

The value of a spouse’s ownership interest is not necessarily determined by multiplying the value of the entire business by the spouse’s ownership percentage. The analysis requires consideration of the specific economic characteristics of the interest, in areas such as:

• +Ownership percentage
• +Voting and management rights
• +Distribution rights
• +Transfer restrictions and redemption provisions
• +Buy-sell, shareholder, operating, and partnership agreement provisions
• +Rights upon a sale, liquidation, or dissolution

Governing documents may therefore be important to the valuation. Counsel determines their legal effect; we evaluate their financial and economic implications for the interest being valued.

Valuation discounts may be relevant when permitted under the applicable standard of value and legal framework. Where appropriate, we analyze discounts for lack of control (DLOC) and lack of marketability (DLOM) based on the specific characteristics of the ownership interest, including voting and management rights, distribution rights, ownership concentration, transfer restrictions, expected holding period, and relevant market evidence.

How a Business Is Valued in Divorce

A reliable valuation of a privately held business ordinarily requires more than applying a formula to a tax return or a single year of financial results.

The appropriate valuation approach depends on the nature of the business, its financial characteristics, the available information, and the purpose of the valuation. Depending on these factors, the analysis may consider the income, market, and asset approaches to value, which are set out at greater length in our explainer on business valuation methods.

Financial and Forensic Analysis

The financial records underlying a business valuation may require additional analysis to understand the company’s historical performance and the financial activity of its owners and related parties. This can be particularly important in closely held businesses, where personal and business finances may overlap or transactions with owners and related entities may not occur on an arm’s-length basis.

Depending on the scope of the engagement and the financial issues involved, our forensic accounting and financial analysis may include:

• +Tracing funds, transfers of assets, and other transactions involving the business and its owners
• +Reconciling financial statements, tax returns, general ledgers, and bank records
• +Analyzing owner compensation, distributions, and other payments
• +Reviewing related-party and intercompany transactions
• +Identifying personal or non-business expenses paid by the business
• +Analyzing shareholder or member loans
• +Analyzing changes in revenue, expenses, or other financial activity

Findings from the forensic analysis may also identify financial matters relevant to the business valuation.

Forensic accounting and business valuation are related but distinct analyses. Forensic accounting may be used to trace funds, analyze transactions, or quantify contributions and distributions, while a valuation determines the value of the business or ownership interest under the applicable standard of value. When both are required, we consider the findings together while maintaining the distinct purpose of each analysis.

Expert Analysis and Litigation Support

We assist counsel throughout the financial and valuation aspects of marital dissolution matters, from financial discovery and analysis through settlement discussions, mediation, deposition, and trial. That work is described further under litigation support.

Depending on the engagement, we may serve as a consulting or testifying expert. Our work may include identifying financial issues, developing document requests, analyzing financial records, preparing an independent valuation opinion, reviewing opposing expert analyses, and providing deposition or trial testimony.

When reviewing another expert’s valuation, we evaluate the assumptions, methodologies, financial adjustments, and supporting evidence. Areas of review may include normalized earnings, projections, valuation methods, discount and capitalization rates, market evidence, goodwill, and the treatment of control and marketability where applicable. Where a written critique is required, see our litigation support services.

Valuation experts may reach different conclusions based on differences in assumptions, professional judgment, methodologies, or interpretation of the available information. We independently evaluate those differences and assess whether the analysis is supported by the available financial and market evidence and the applicable valuation framework.

Early coordination with counsel can help identify the relevant business interests, financial records, valuation issues, and areas requiring additional discovery. Our objective is to provide independent, well-supported analysis that clearly communicates the financial and valuation issues relevant to the matter.