If you are facing divorce, the business you own will take center stage during the property division process.
The valuation placed on the business will be of primary importance, and you should know what to expect.
Standard of value
If you and your spouse are going to put your business on the market, or if one of you wants to purchase the other’s share of the company, you will need a valuation in order to arrive at the appropriate price. Before going ahead with an appraisal, you must define the standard of value. This speaks to hypothetical conditions a professional will use in determining the value of the business.
In divorce cases, there are generally two standards. The fair market value refers to the price that would exist between a willing seller and a willing buyer if there were no compulsion for either to sell or to buy. Using this standard, an appraiser might apply a discount, such as a discount for lack of marketability, or DLOM, in order to calculate the value of a minority interest. On the other hand, fair value is a price that depends on the context of use. The court that has jurisdiction over the divorce case determines the fair value of a business.
About double dipping
A divorce attorney will likely be on the lookout for an issue called double dipping. This can happen if the court awards one spouse income from the business in two ways: first, through income allotted for support, and second, during the division of assets. If the business owner’s salary is the basis for determining spousal support instead of the adjusted rate the appraiser used in placing a value on the company, double dipping has occurred.
Understanding true value
It is important to know the value of the business at the time you and your spouse separated. Consider adding a forensic accountant to your divorce team and any other professionals your attorney recommends. The more experienced professionals you have, the better your chances for obtaining the true value of the business that will hold the spotlight in your divorce.