Business Valuation during Divorce

 Posted on December 15, 2017 in Business Valuation

When a couple decides to divorce, the assets and debts accumulated during their marriage will be equitably distributed to each party. Sometimes this means that assets are sold off so that they can be converted into liquid funds. On the other hand, Illinois law permits one party to be awarded the asset in lieu of receiving other marital assets. Dividing assets in the latter fashion is a very complex process if a family business exists. Ensuring that a proper valuation is reached so the business asset may be offset by other marital assets is a time-consuming and difficult process that requires the use of experts.

Illinois is a state that follows the equitable distribution theory of marital asset allocation in a divorce. What is a marital asset? Generally speaking, a business is classified as a marital asset if it was acquired during the marriage, and was not acquired by inheritance or gift. (Inheritances or gifts to one spouse are considered non-marital property by definition.) What is considered an equitable distribution? Each case is very different. Rather than simply selling all the assets and splitting the proceeds, some parties may prefer to be awarded a particular asset in lieu of another asset. A business, assuming that it is a marital asset, is no exception to this process. Sometimes one spouse wishes to keep the business, especially if it is a professional practice like a doctor’s office. A party may do so, but he/she will have to give up other marital assets in exchange for it. This means that an expert must place a value on the business before an equitable distribution of marital assets may be reached. .

How Is a Business Evaluated?

There are multiple ways to appraise a business, though some are preferred over others. The market approach compares the business to other, similarly situated enterprises. The asset approach subtracts a business’s debts from the total value of its assets. The income-based approach simply examines current and/or projected earnings to assess a plausible estimate of value. Different approaches are good for different types of businesses. However, many appraisers, in recent years, have tended to use a combination of all three methods. It is important, regardless of which accounting process is used when evaluating the business, that goodwill be taken into consideration. What is goodwill? Goodwill is often defined as the value of the company’s brand name, solid customer base, good customer relations, good employee relationships, and any patents or proprietary technology it owns. After a period of time in business, a company will have built up a certain amount of goodwill with its customers, and Illinois laws allow for such a factor to make a difference in valuing a business. Experts are well-versed in assessing goodwill in a business and placing a value on the business as a whole as a result.

Call Our DuPage County Divorce Attorneys

If you are concerned about the fate of your business during a divorce, Kathryn L. Harry & Associates, P.C. may be able to assist. Our knowledgeable DuPage County divorce attorneys can sit down with you and strategize the best path for you going forward. Contact our offices today to set up an initial consultation.

Source:

http://www.ilga.gov/legislation/ilcs/documents/075000050K503.htm