In any Florida divorce, all marital property must be divided between the divorcing couple. Florida is an “equitable distribution” state, meaning the property division must be fair under the circumstances. In practice, this may not mean exactly equal. If one or both parties to the divorce owns an interest in a business, that business may be one of the more significant assets subject to division in the divorce. Unfortunately, unlike bank accounts, houses, and cars, establishing the value of a business can be challenging and open to dispute. If you or your spouse owns a business, you need to understand the basics of business valuation in a Florida divorce.
Before we reach the point of actually valuing a business, though, there are certain questions that need to be asked, including:
- Is the business marital property?
- Can the parties agree on how their assets and liabilities will be divided, or will the court have to decide?
- What type of business entity is it?
- Are there any other owners of the business?
- What valuation method should be used?
Questions to Answer Before Valuing a Business in a Divorce
The first question that needs to be asked is whether the business is separate or marital property. Separate property is property that is owned by one spouse and is not subject to division, often because it was acquired by that spouse prior to the marriage and kept separate from marital assets. For instance, if Steve bought a half-interest in his brother's food truck business prior to the marriage, and his share of business income went into a separate account in his name only, it is unlikely that a court would award Steve's wife any part of the business in a divorce. If a business is separate property, the inquiry ends there.
If the business is marital property, either because it was acquired during the marriage or because it was commingled with marital assets, the inquiry goes further. At this point, it is worth investigating whether the couple can reach agreement on how to divide their assets, or whether they will need the court to do so.
Most of the time, if a couple can agree on a fair division of property, their divorce judge will approve the division, including the division of any business interests. If not, the court will need to divide the couple's assets.
The type of business entity affects the division. The business may be a sole proprietorship, owned by one person—the simplest type of business entity. Or one spouse may be a member in a professional partnership or limited liability company. Less commonly, a spouse will be an owner or part owner of a C or S corporation.
A common scenario is for one spouse to have a partial ownership in a family business. If the husband and his brother started a business together with each having a 50% interest, it would make little sense to award the husband's share of the business to the wife in the divorce. However, if the business interest was a marital asset, it would still need to be valued so that the wife could receive an equivalent amount of other property.
All of which leads us back to the original question: how do we arrive at the value of the business so that that value, and other assets, can be fairly divided in divorce?
Methods of Valuing a Business
It is essential to have an experienced professional determine the value of a business to be divided in a divorce. This is one area in which the value of the whole is more than the sum of its parts.
It's relatively simple to value certain assets, such as a bank account, inventory, or equipment. But the valuation of a business as a whole is somewhat more complicated, in part because some of the business's assets are intangible, like reputation or "goodwill." For instance, two restaurants could be located next door to each other in identical spaces. Their furniture and furnishings and kitchen equipment might be very similar, and the food (inventory) in their kitchens might be the same. But if one restaurant was a year old and the other had been operating continuously for 20 years, with the same staff and a loyal clientele, it's no surprise that the second business would be worth more.
There are typically three methods of business valuation that a valuation professional might use:
- Cost or Asset-Based Method: This approach attempts to determine a company's value by assessing the value of the business's assets, less any liabilities. Since most companies are worth more as a going concern than the sum of their assets, this method may determine a "floor" for the value of the company, or may be used when the goodwill of the business is not important, such as, for example, a souvenir stand customers are only likely to frequent once and whose ownership does not make a difference to clientele.
- Market Method: This approach examines transactional data such as private or public company transactions, stock market data, and the like. This method may be used when data is available regarding arms-length sales of similar businesses in similar circumstances that could suggest what the business at issue could be sold for.
- Income Method: In this approach, the value of the business is based on the company's current earnings and its projected income. An appraiser would use formulas to reduce expected future income and other economic benefits to a present value amount. This is the most commonly-used method.
Especially if the spouses disagree significantly about the value of a business, they will likely each want their own professional to conduct a valuation. It is important to know which valuation approach each professional is using. Depending on the type of business, the different methods could yield very different numbers.
Let's consider the food truck example above. Steve owns a 50% interest in his brother's food truck. The truck itself is a used, older model. The food truck, and its inventory, are the business's only tangible assets. Valuing the business using the cost approach would probably yield a fairly low figure. The market approach might yield a somewhat higher amount; food trucks are increasing in popularity and recent sales might indicate such a business is worth more than its tangible assets.
The income approach might take into account that Steve's brother has recently won awards at several food truck festivals, and has an increasingly enthusiastic following. Thus, this method might yield the highest value for Steve's interest in the business. If Steve's expert values the business using the cost method, and his wife, Anna, has a professional using the income method, their numbers could be very far apart.
This is where the last piece of the puzzle comes in: having a divorce attorney who understands business valuation and can attack the flaws in an opposing party's valuation. Retaining a knowledgeable expert and a skilled attorney could make a difference of tens or hundreds of thousands of dollars to your bottom line when the dust from your divorce settles. As such, hiring the best professionals you can should be viewed as an investment rather than an expense.
If you are facing divorce and a business or business interest is among the assets to be divided, contact Jimenez Legal to schedule a consultation to discuss your needs.