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Valuing your family business for your divorce

On Behalf of | Dec 15, 2020 | Family Law |

Splitting an Indiana family business makes the task of dividing marital assets more complex than a routine divorce, especially if you use one method and your spouse uses another. Having a formal valuation by an impartial third party may help assign a value acceptable to both of you.

According to the American Bar Association, before dealing with who has how much interest in your private business, you must first determine whether it is marital property. Factors contributing to this determination include the entity’s status before the marriage, the extent of personal efforts put into its success and financial contributions. After establishing that that business is a marital asset, you can begin establishing its value.

Approach to valuation

Several approaches are acceptable when determining its value in a divorce. The market approach looks at similar businesses and the value when sold. This helps estimate the current market value. The income approach looks at current earnings and projects them forward.  If the organization has relatively stable margins and estimated growth, the Capitalization of Cashflow method can show growth at a steady rate in perpetuity. The Discounted Cash Flow method allows for flexibility in debt repayment, margins and growth rates.

Understand the options

Once you and your ex agree to the valuation, you typically have three options. You can buy out your spouse by making a cash payment for your portion of the business or you give other marital assets to your spouse that hold similar value as the business. The second option involves retaining the position of co-owners of your company. If your split is amicable, it could be beneficial to both of you. The third option is selling the business to a new owner.

In situations where compromise is unrealistic, liquidating business assets and closing the company is an option. Learn more about property division here.