Business Valuation in Divorce

As we know, closely held businesses can be subject to equitable distribution in divorce. In order to ensure that any division of a business interest is equitable, an accurate evaluation is crucial - however, determining fair market value of a closely held business can be challenging. In most instances, an expert is required. The expert hired for valuing the business will usually consider a list of factors set forth by the Internal Revenue Service (IRS) in Revenue Ruling 59-60. Those factors are:

1. The nature of the business and the history of the enterprise since its inception.
2. The economic outlook in general and the condition and outlook of the specific industry in particular.
3. The book value of the stock and the financial condition of the business.
4. The earning capacity of the business.
5. The dividend-paying capacity of the business.
6. Goodwill* or other intangible value.
7. Stock sales and the size of the clock of stock to be valued.
8. Market price of similar stocks.

*Goodwill may not be valued and divided in equitable distribution in Mississippi

After reviewing the factors, the business valuation expert will apply one or more of the accepted methods of valuation. These methods of valuation generally assess value by looking at business income, business assets, and comparable sales. Common valuation methods are:

Asset-Based - this approach values a business based on the net value of its assets - equipment, inventory, accounts, real estate, etc. and can be particularly useful in valuing unprofitable businesses.

Income-Based - this approach values the business based on an estimation of a company's future earnings which is calculated through a complicated process of determining the company's "normalized" earnings and investment risk.

Market-Based - this approach determines the value of a business by basing it on the sale of a comparable business. This can be an effective way to determine fair market value when such information is available, however, with many closely held businesses, finding information on the sale of a comparable business can be difficult.

The presence of a closely held business in a divorce can drastically complicate the proceedings. As you can see, getting a business valued accurately is itself a complicated process, but one that is crucial to a truly equitable distribution of the marital estate. Additionally, complications can arise if both sides to a divorce each hire their own expert to perform a business valuation and the experts disagree. If you are facing a divorce and you or your spouse has an interest in a closely held business, it is of paramount importance that you enlist the aid of a divorce attorney to ensure that your rights are protected.

Jonathan T. Day, Esq. is a Divorce & Family Law attorney serving the Jackson, MS metro-area. You can reach him at (601)-707-8953 or jtd@jonathantday.com.