July 08 , 2022

The Importance of an Accurate Business Valuation in Divorce Negotiations 

Not many people enter into a divorce negotiation expecting things to go smoothly. But with careful planning and an understanding of the business value at stake, you can give yourself the best chance for a favorable outcome. This article will explore how to identify and protect your business assets during divorce negotiations and ensure you get an adequately valued portion of that business during a divorce. 

Business Value and Divorce Negotiations

When it comes to divorce negotiations, the business value of a company is one of the most important factors to consider. If one spouse owns a company, they may be tempted to try and undervalue the business, while the "non-owner" spouse may be tempted to overvalue the business. I see the latter all the time in divorce negotiations - accomplished by hiring a valuation "expert" who manufactures a result through bias and other methods. Detecting and calling out bias is one of our specialties and we have been succesful doing so in court proceedings.

At its basic level, there are a few different ways to value a business for divorce purposes. The primary method used is to look at the company's fair market value and what it would be worth if it were sold on the open market. Another option is to look at the business's fair value depending on legal guidance in the state. Both consider things like the company's earnings/cash flow, risk profile, the brand's value, and the company's goodwill. Burns Valuation Consulting can help determine the best way to value your business for divorce negotiations. We have experience working with individuals, businesses of all sizes, and various industries over our 20+ years of business valuation experience.

When calculating the business value during a divorce negotiation, the company's assets, liabilities, risk, and earnings/cash flow are the primary factors considered. The value of the business is not just the sum of its parts. Other considerations such as future earning potential and intangible assets must also be taken into account. This process can be complex, so it is essential to consult a professional valuation expert to ensure an accurate assessment that will take into account all of the relevant factors to ensure a fair settlement.

Important Factors During Divorce Negotiations

The business valuator's role in divorce negotiations is critical in ensuring that the business value is accurately determined. They will analyze and determine how each of the following impacts business value:

  • Revenue - what is recurring?
  • Expenses - adjusted for market rates
  • Cash Flow - not just profitability
  • Risk Profile - market and company specific
  • Outstanding debts - current vs long term 
  • Market and Economic Data

This information is essential in negotiating a fair settlement for both parties and should be considered without bias from either side. In addition, too often, people make a few common mistakes during divorce negotiations that can negatively impact the outcome. These include:

  • Failing to assess future earnings potential: Another mistake people make is failing to determine the future earnings potential of the business during divorce proceedings. This can lead to an unfair settlement as one party may be unaware of the true earning potential of the company. Burns Valuation Consulting can assess the business's future earnings potential, considering factors such as the current economic climate and the company's growth prospects. This information can be used to negotiate a fair settlement for both parties.
  • Failing to Consider the Impact of Compensation and Avoid Double Dipping: In many cases, one spouse may be the primary breadwinner while the other takes on more of a supportive role. This often leads to negotiations where the non owner tries to be compensated for owner salary via spousal maintenance as well as adjusted business value. Non market owner compensation can significantly impact the business's value result as it impacts the company's future earnings potential, making the help of a professional valuator necessary to get your share of your business. To avoid this, it is essential to consider the impact of compensation on the business's value, adjust for market, and negotiate a fair settlement.
  • Removing Emotional aspects of the divorce and prolonging the fight unnecessarily: In any divorce, some emotions are bound to be involved. However, it is essential to try and remove as much emotion from the process as possible. At Burns Valuation Consulting, we are not emotionally involved in the divorce other than ensuring you get a full and accurate business proposal. Allowing emotions to cloud your judgment can lead to bad decisions that can negatively impact the business's value without valuation by a professional. It is also vital to avoid prolonging the divorce proceedings unnecessarily, as this can lead to additional legal fees and wasted time.

When a couple with a family-owned business divorces, dividing up the assets can be complicated. The business's value must be determined to come to a fair and equitable divorce settlement. Burns Valuation Consulting can help you choose the value of your business so that you can get a fair settlement in your divorce. We will consider all of the factors that influence the value of your business, including the recent changes to the tax law. Contact us today to learn more about how we can help you.

Or contact Brad Burns CVA CFA directly at 770-380-2406 or for a free consultation.