May 22, 2024 •HoganTaylor
In many instances where an individual needs a valuation for their business, they find themselves at a watershed moment in their life. Sometimes, this can be a happy moment, but on other occasions, it’s a more painful proceeding, such as a divorce.
For many couples, their ownership interest in a business represents their largest marital asset by far. Even a moderately successful small business likely has more value than assets including a marital home, vehicles, or bank accounts. That can make the value of the business in question an extremely important topic during divorce proceedings.
This issue is further complicated by the level of difficulty in assigning an accurate value to a private business. It’s impossible to monitor the value of a private business the same way you would track the market price of a publicly traded company. Determining the true value of the business requires the support of business valuation professionals.
In this guide, we’ll explore the basic principles that determine how businesses are valued in a divorce. It’s important to note that these approaches can differ significantly from case to case depending on the unique situation of each divorce proceeding.
If you’re in the midst of a divorce and need to obtain a valuation for your business, we encourage you to reach out to HoganTaylor’s business valuation team.
How is the Value of a Business Calculated in a Divorce?
The methods used to determine the value of a business in a divorce proceeding are primarily driven by the nature of the divorce proceedings.
Of course, no two divorce proceedings are the same. In some marriages, the spouses may have joint ownership of a business. In others, one spouse may hold all of the equity in the business, with the income from the business serving as the couple’s primary income stream.
Think of the business as a pie. A business valuation professional won’t tell you how to divide the pie – that’s not their job. But they will tell you what the pie is worth. From there, you, your spouse, your attorneys, and if necessary, a mediator or judge, can determine how to fairly split the equity in the business.
If the divorce is relatively amicable, with both sides working together to find an equitable agreement, obtaining a valuation can be relatively simple. On the other hand, if your divorce proceedings are headed for trial, valuation professionals will be required to use more comprehensive analysis methods that stand up to legal scrutiny.
Which end of this spectrum you find yourself in is the primary determinant of the type of business valuation report you will need.
Types of Business Valuation Reports
There are two main types of business valuation reports: Calculations of Value and Conclusions of Value. Let’s break down the key differences you need to be aware of.
A Calculation of Value is the less comprehensive of the two reports. It offers all parties an increased degree of flexibility, allowing the valuation analyst to incorporate certain assumptions about the business and the scenario into their valuation calculations. These reports are typically used for informational purposes, such as for mediation purposes in a divorce setting.
If a divorce is relatively amicable, and the couple solely seeks to obtain an independent assessment of the value of a business, a calculation of value, or a similar consulting-type relationship, may provide the independent analysis that a couple needs to feel comfortable determining the best path forward.
A Conclusion of Value is a far more robust report that is typically required when the value of the business is subject to legal scrutiny. In these reports, the valuation analyst conducts in-depth analysis, making use of several business valuation methodologies to deliver an opinion on the value of the business in question.
If your divorce involves a “trier of fact”, such as a judge or arbitrator, you would be best served by obtaining a conclusion of value report from an accredited business valuation firm.
Who Calculates the Value of a Business in a Divorce?
It’s considered best practice to retain accredited business valuation professionals to conduct a valuation of your business. These professionals may hold several qualifications, including Certified Public Accountant (CPA) status, the Accredited in Business Valuation (ABV) qualification, and/or Certified Valuation Analyst (CVA) status.
Many accounting firms, including HoganTaylor, provide business valuation services for divorce proceedings as part of their Forensic, Valuation, and Litigation Support group.
Oftentimes, these firms provide a variety of services that are needed in a divorce proceeding. They’re not only able to provide a business valuation, but they can also assist with forensic accounting investigations if there is a suspicion one spouse is trying to downplay the value of the business, and can serve as business valuation expert witnesses to testify to their valuation report.
If you’re looking for a business valuation service in Arkansas, Oklahoma, or the surrounding states, reach out to HoganTaylor.
HoganTaylor: Experienced Business Valuation Professionals
A divorce is a stressful time for everyone involved, particularly when there are major assets to be divided up. During this time, it’s important for individuals to seek the support of trusted advisors who can help resolve situations swiftly.
As we’ve discussed, the way your business will be valued in a divorce is largely driven by the nature of the divorce proceedings. Regardless of what your situation is, the experienced business valuation analysts at HoganTaylor are here to help.
Our team brings in-depth knowledge and proven expertise to every valuation engagement, offering objective analysis that cuts through uncertainty to allow all parties to move forward with increased confidence.
Ready to learn more? Reach out today and set up a time to talk to a HoganTaylor expert. We’ll work diligently to understand the intricacies of your unique situation and help you navigate the uncertain territory you find yourself in.
How HoganTaylor Can Help
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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