By: Barbara Ulrichsen, Esq.
If a spouse forms a business during the marriage (even if it is not titled in joint names), the business is likely to be considered an asset that is subject to equitable distribution. If the business was owned by a spouse prior to the marriage or was received by a spouse during the marriage by way of gift or inheritance, all or part of the appreciation of this business may be included in the marital estate for purposes of equitable distribution.
Valuing business interests, as well as any appreciation of such interests, is one of the most complex issues in a divorce.
Generally, there are three possible methods of valuation: (1) the market approach, which involves analyzing data from sales of comparable businesses and using this data to establish value; (2) the income approach, which involves calculating the present value of anticipated future earnings of the business; and (3) the asset approach, which involves valuing the current assets of the business and deducting the liabilities to determine a net asset value.
When valuing the business under the income approach, the appraiser usually reviews a number of years of tax returns and makes adjustments to the reported annual profit. Typical adjustments include increasing the profits for personal expenses paid through the business and cash receipts that were not reported for tax purposes. If an owner spouse works in the business and is not paid a salary, the appraiser may deduct a reasonable salary from the profit. On the other hand, if the owning spouse draws a higher salary than is reasonable for the job performed, the excess salary is added back to the profits. After determining the adjusted profits for a period of years, an average adjusted income is developed that is then subject to a multiple. The multiple depends on a number of factors and is intended to reflect the risk in the business. The value of the business is then derived from these factors.
It is critically important that in cases that involve business, divorce litigants retain an attorney who is familiar with the business appraisal process and can assist the litigant in engaging a skilled business appraiser. At Ulrichsen Rosen & Freed LLC, we have significant experience in handling cases involving business valuations.