Anyone who’s gone through a divorce knows how it’s not exactly a walk in the park. The thought of losing all you’ve invested in the relationship is bad enough, but if you own property together, things can get extra stressful.
The process of valuing and splitting property is often long and taxing, and having a reputable divorce lawyer is critical. At the Law Office of Heather M. Ward, we’ll provide all the guidance you need and represent your best interests to ensure you’re not cheated out of what’s legally yours.
Most times, however, a divorce lawyer isn’t the only professional you’ll need help from. Your attorney will be working with an accounting expert such as a Certified Public Accountant (CPA) to accurately calculate the value of the business before it can be divided between the two parties. But before that, they would have to determine whether the business interest in question is jointly or separately owned.
Marital and Separate Property
A business interest that was acquired during the marriage with joint funds is generally considered marital, and ought to be shared between both parties. If the interest was acquired before the marriage or with separate funds, it may be considered separate property. The valuator will also look at financial and labor-related contributions given by either spouse (while still married) that aided in the business growth.
Once it’s determined that the business is marital property, the next step is to determine its worth so each spouse can be assigned a share. Most CPAs and business valuators use three methods to determine a business’s value.
Despite being favored for its accuracy, the income approach is probably the most complex of the three methods. It can be done in two ways:
- Capitalization of earnings uses the business’ current earnings and cash flows to calculate its future earnings and value. It works best for stable businesses that have a history of generating relatively steady earnings and can be expected to keep doing so in the future.
- The discounting cash flow method is more complex, and you’ll definitely need a CPA for this. This method is more suitable for a business whose future earnings are expected to fluctuate. A CPA will use past cash flow history to project future earnings, then ‘discount’ that figure to account for any risks the business might face in the future.
Most CPAs would avoid this method if they could. It works best for businesses that are being sold, where the valuator will analyze the business then compare it to similar businesses in the region. If, for instance, you and your spouse owned a coffee shop in Boston, a valuator would compare it to similar coffee shops in the city before assigning it a value.
To do this, they’d need to first determine the business’ profitability, and then locate a similar business (same industry) in the same geographical region with similar earnings. However, most valuators avoid this method, as the process of finding a business within the needed parameters can be too taxing.
Also called the adjusted net asset method, this is focused on assets and liabilities. Here, a valuator will find the business’ value by calculating the difference between its assets and liabilities. It’s often used if the first two methods couldn’t be used to get an accurate value.
When a business doesn’t generate enough earnings to capitalize into a future value or a valuator is unable to find businesses with comparable sales, the asset approach is the next best choice. It’s also suited for businesses that own a lot of equipment or real estate, and it only works if the assets are worth more than the liabilities.
Get Legal Assistance!
Divorce is hard enough without the stress associated with valuing and dividing jointly owned property. If you and your spouse need expert legal assistance with the process, be sure to contact the Law Office of Heather M. Ward at (617) 903-8955 for a free consultation.