You and your spouse took the time to create a family business for years. Maybe you started it together. Or maybe you’ve had it for a while before you wed. Now, having to deal with a divorce, you are unsure about the company’s future.
Will you have to sell it? Does the husband or wife receive half? Most importantly, who determines the value of the business?
These concerns make business valuation in divorce an important part of the process. A family business isn’t like a savings account with a clear balance. Its value depends on earnings, assets, debts, and future growth.
There are specific rules in New Jersey with respect to marital property division. Therefore, knowing how they apply to your business can help you make informed decisions.
Does Your Family Business Qualify As Marital Property?
The Court must first determine if your company is part of the marital estate prior to anyone placing a value on your company.
New Jersey has equitable distribution laws. This is a fair division of the assets, but not an equal division of assets.
If you started your business during marriage, its value may be subject to division. However, if you owned it before marriage, different rules may apply.
For instance, let’s say you had a restaurant business before you got married. You’ve grown over the years, added staff, and boosted sales.
Your spouse may have a claim to some of that growth. However, the court must consider what caused the increase in value.
Enhancing a Business’s Value in Divorce
Annual sales don’t tell the whole story for your company. A business with an annual income of $500,000 could have significant liabilities or expenses.
So, how to value a business in divorce comes down to what the business is worth and how much it can earn in the future.
New Jersey courts recognize three main business valuation methods: the income, market, and asset approaches.
The Income Approach
The approach is based on your business’s potential profitability.
An expert looks at historical revenues, costs of operation, and forecasted future revenues. They can also make unusual charges that impact profits.
The Market Approach
The market approach involves benchmarking your company with businesses of a similar nature that have been sold.
Assume you are a small cleaning enterprise. Recent sales of similar companies may be examined by an expert.
They will take into account differences in income, size, services, and location.
It’s not always easy to find a close match, though.
The Asset Approach
This approach is based on your business’s assets and liabilities.
Assets can consist of inventory, vehicles, equipment, buildings, or cash. The expert then explains business debts.
If your company had $400,000 in assets and $150,000 in liabilities, for instance, the net worth would be $250,000.
But it’s not necessarily a true picture of the company’s value. It may be significant as well because of its earnings and other aspects.
Business Data That Drives Financial Value
The first step in the process of a proper New Jersey business valuation is building up accurate financial records.
Common records include:
- Recent Business Tax returns
- Profit and loss statements
- Use balance sheets and bank records to determine the financial status of the business.
- Payroll records and owner compensation records
- Loans, debts (business loans).
- Details of equipment and inventory.
- Agreements of partnership and ownership
For instance, your company can see a drop in profits after buying costly machinery. But that purchase might also be beneficial to the business.
Thus, if accurate records are kept, it will help avoid misunderstandings and allow a more accurate valuation.
Personal Goodwill vs. Business Goodwill
Not all assets of a business show up on the balance sheet.
Imagine a dental office where patients always come back and trust one dentist. Some of that value is based on the dentist’s personal reputation.
This is known as personal goodwill.
However, enterprise goodwill is more rightly the property of the business. It can be because of its reputation, clientele, systems, or its geographical position.
Goodwill is valued in New Jersey courts when valuing businesses. But all goodwill is not treated the same.
It may require an expert to distinguish between the earning power that the person owns and some of the value that might pass with the transfer to a new owner.
If Spouses Disagree About Business Value
You have a family business worth $200k. Your spouse estimates it’s worth $500,000.
In a divorce, each spouse can possibly employ an expert for the company valuation.
Two experts can, however, come to different conclusions.
It would be normal for profits to increase. Another may experience an increase in cost, a decrease in sales, or a financial risk.
Both sides can review the supporting records and assumptions rather than rely on either estimate alone.
In some cases, further analysis will help to refine the disagreement. At trial, the judge reviews the evidence.
Business Valuation in New Jersey: Premarital Companies.
What if you owned the business prior to your wedding?
In general, property you acquire before marriage counts as separate property.
For example, suppose your landscaping business was worth $100,000 when you got married. After 15 years, its value increased to $400,000.
However, the court does not automatically treat that increase as marital property.
The court looks at the reasons for the growth of the business.
Were you actively involved in the expansion of operations? Did the company receive funding from marital sources? Or did external market forces put a premium on it?
The information is used to assess if any appreciation should be included in the marital estate.
As such, it’s crucial to have documents that document the earlier value of your company.
Choosing the Right Business Valuation Date
During your divorce, your business may lose customers, buy equipment, or suffer losses.
In New Jersey, the date of filing the divorce complaint may be a significant date to consider when valuing an active business.
When the circumstances deem it appropriate, however, another date may be considered by the courts.
For example, business expansion following filing could be due to one spouse’s ongoing efforts.
The company’s value, on the other hand, can be impacted by external market conditions, without either spouse’s knowledge.
When determining the valuation date, the court will take into account these differences.
How To Save The Family Business After The Divorce
Determining the value of your company does not imply that you have to actually sell it.
Often, spouses can work out a solution that permits one spouse to maintain the company, while the other receives a different type of distribution.
One alternative is to buy out.
Let us assume the value of the divisible business interest is $300000. Both spouses agree that each should receive $150,000 from this asset.
The one spouse who retains the business could give the other spouse money or transfer other marital property.
Alternatives to this could involve the sale of the company with the proceeds split.
In some cases, the former spouses may also be able to retain the right to co-own the property, but that can be a tricky situation to navigate.
Common Mistakes That Affect Business Value
Choices that you make while you’re in the midst of a divorce can cause future issues.
For instance, if no records are kept, it could make funding a transfer seem suspicious for hidden assets.
Likewise, restructuring a payroll system or increasing income can increase scrutiny of the finances.
Another mistake is to confuse revenue with profit and business.
For a company, it could occur that they make large sales, while almost all costs of running the business are met. Additionally, please remember to stick to the previously agreed-upon agreements.
Partnership contracts, shareholder agreements, or prenuptial agreements might affect ownership rights or the way in which the division proceeds.
Talk with your lawyer about any significant changes prior to making the changes.
Why Business Valuation In Divorce Is Important
Still, there may be questions remaining: How is a business valued in a divorce, and why does the number matter?
A reliable estimate assists in determining the value of the business interest, which will be properly allocated.
It can also be utilized to enable spouses to discuss buyouts and other settlement options.
New Jersey courts follow a number of guidelines when attempting to distribute marital assets in accordance with N.J.S.A. 2A:34-23.1.
These include the financial situation, contributions, and the characteristics of assets of both spouses.
Protect Your Business and Economic Wellbeing
Your family business could be a years-long investment of your hard work, your savings, and your sacrifice. Therefore, it’s natural to worry about what will happen to your business during divorce.
At the Law Office of Jennifer J. McCaskill, LLC, our team helps clients understand property division and navigate the financial challenges of divorce.
Looking For Legal Advice On Your Divorce Or Separation?
Contact our Monmouth County family law attorneys to find out what you can do next and discuss your situation.
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