Business valuation is a touchy subject for many divorcing New Jersey couples. When a couple owns a business, both partners usually contribute to it in separate but equally important ways. Putting a monetary value on each partners' contribution to a jointly-run business can be difficult, but it is necessary as part of the distribution of property during the divorce process. Valuing and dividing shares of a business becomes even more difficult when the business was both partners' primary or only source of income.
Like decisions about spousal support or child custody, many factors must be considered when determining how to fairly divide a business during a divorce. The following four factors are the first things to be considered by the court:
- The business' debts and its assets
- The date of the business' valuation
- The business' income
- The best formula to use to determine the business' value
Once these factors are determined, the court can move on to the actual valuation process. This process often includes help from experienced business operators and appraisers. There are two common formulas that are used to value businesses. These formulas are as follows:
- The book value method. This method of appraisal uses the business' financial records to determine its value. It considers the business' assets and adjusts their value for age, future earning potential, and depreciation.
- The market approach method. This is the method that a prospective buyer would use when valuing a business. It involves the consideration of a business' future earning and growth potential and assigns it a fair market price.
The formula that is best for an individual business is determined by its debts, income, and the divorcing couple's plans for its future. Once an appropriate formula has been decided for a business, its assets' value must be determined. There are two types of asset to consider when making this appraisal:
- Tangible assets. This refers to any office furniture, kitchen equipment, company cars and unsold inventory. It's the product that can be easily sold for a profit.
- Intangible assets. These are the things that can't be sold as easily. Intangible assets are trademarks, patents, and relationships with customers and the community.
Both of these types of assets must be considered during the valuation process if the couple co-owns the business. Additionally, the court must determine whether or not each partner contributed to the business equally. In some cases, one spouse might have made a business his or her full time career while the other only helped with it part time.
It is important to discuss your future plans for your business with your attorney. Do you plan to sell it? Keep it? Buy out your former spouse's interest in it? The answers for these questions can determine how to proceed with your business' valuation during your divorce. Your relationship with your former spouse and your current financial situation, as well as your former spouse's, all play into this decision. Your options are can also largely be determined by your former spouse's wishes for the business' future.
If you are a business owner currently going through a divorce and you want to learn more about your options, call Villani & DeLuca at (732) 965-3525 for your free legal consultation. You'll be able to speak with one of our firm's experienced divorce attorneys who can answer your questions and guide you toward the best way to settle your individual case and concerns. Before you start the business valuation process, know your rights as an owner. Arm yourself with knowledge and expert guidance before embarking on this difficult journey.
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