Family Law

Value of Closely-Held Businesses in Divorce

By J. Benjamin Stevens

When spouses own a business and they are getting divorced, the value of the business becomes a major focus of the division of property. Michelle O'Neil recently explained the concepts of valuation of a closely-held business entity that affect and even minimize the value of a closely-held business entity:

Valuing a business is a complex, and often expensive part of a divorce. A business consists not only of tangible assets like buildings, bank accounts, inventory, tools, fixtures, furniture and machinery; but also, intangible ones such as mortgages, leases, patents, trademarks, unlisted stock, skilled labor, accounts receivable and most notably, 'goodwill.' A business is valued usually based on the fictional assumption of a sale between a willing buyer and willing seller.

The most common legal concept that affects the value of a closely-held business is the distinction between the personal goodwill and commercial goodwill of the business. The personal goodwill is that goodwill attributable to the person of the business owner. Take a small bookkeeping firm, for example, owned by a wife. Most of her clients do business with her company because they like her and trust her work. her business has no reputation separate from her. That value of the business attributable to her presence is personal goodwill. The value of a business attributable to personal goodwill is the spouse's separate property.

Commercial goodwill, on the other hand, is that goodwill that exists independent of the business owner. It is the independent reputation of the ABC Company that exists separate from the business owner. The value of a business attributable to the commercial goodwill is community property if the business would otherwise be community property.

Also diminishing the value of a business is the frequent occurance where a business remains subject to the control of multiple owners. This discounts the value to any one of the owners for lack of control. Another factor that decreases the value of a business involves marketability, which is defined as the ability to convert an investment into cash quickly at a known price and with minimal transaction costs. The more difficult a business would be to sell, the greater the discount for marketability.

Many businesses have "Buy/Sell Agreements". These cannot be relied upon to calculate a business' value. Such agreements typically protect the majority partner interests and rarely reflect actual value.
The best way to approach valuation of a business entity in a divorce is to hire an independent business appraiser—a CPA with an Accredited in Business Valuation (ABV) credential or a certified professional, like a Certified Business Appraiser (CBA) or someone recognized by the American Society of Appraisers (ASA).

Source:  "Minimizing Your Business Value in Divorce" by Michelle O'Neil, published at her Dallas Divorce Law Blog.

Full post as published by SC Family Law Blog on February 22, 2010 (boomark / email).