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Business Valuations During Divorce

Divorcing couples who own a business face a complex situation.  Illinois is an equitable distribution state, which means that the courts consider many factors in dividing marital assets, instead of just splitting everything in half; the value of the business is included in this division.  The business must be assigned a monetary value. To determine this, Illinois law requires a detailed analysis of the business. Considerations include the strengths of the business, current and/or future income, and factors such as whether one spouse or both are running the business and whether it was started before or during the marriage.  In addition, there are variables such as salaries and deductions, whether family members are paid on or off the books, and whether profit information has been downgraded or exaggerated.

To arrive at a true business value, it is essential to get help from an independent business valuation professional and to have an attorney on your side.  The experienced and skilled Illinois divorce attorneys at Wolfe & Stec, Ltd. understand that divorce is difficult enough without the complexities of evaluating your business.  We can provide professional guidance to examine your situation and provide specific strategies to protect you and your children before, during and after the divorce process.  We offer a free consultation to discuss your options to make sure you receive a fair share of business and other marital assets.

Ways to Determine Business Value

There are several methods used to determine the monetary value of a business.  Which one is best depends on factors such as the size and type of business under consideration and whether one or both parties will stay with the business after the divorce.  Common methods include:

  • Standard of Value

Illinois law decides what is “fair value” in determining the buyout price of a business during divorce. The statute provides that “fair value” means “the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances lack of marketability.” 805 ILCS 5/12.56(e)

The courts eliminate discounts in the belief that discounts benefit the shareholder who may be awarded a buyout.

  • The Market Approach

This approach values a business by comparing it to similar businesses to determine its present and future prospects. Issues like the business’s relationship with its clients and its role in the community are considered when making this determination.  This standard is not usually used in small divorce cases because of the lack of truly comparable companies, but it is often used in larger cases.  However, since the databases commonly used provide only one year of data, it is often difficult to get an accurate valuation.  This method is usually best for couples who choose to sell their business.

  • Income Approach

The income approach looks at a business’s current and projected future earnings, potential for growth, and expected depreciation. Results from this type of analysis are likely to be part of considerations such as for child support or spousal maintenance. Industry projections are factored in as well.  This approach may be useful for businesses where it is reasonable to project future growth or for situations where there are contracts for future business in place.

  • Asset Approach

The asset approach values a business by adding total assets and then subtracting depreciation and liabilities. This approach is relatively simple and is most useful for smaller, less complicated businesses.

  • Reasonable Compensation

This approach makes adjustments for reasonable compensation for things like salary paid from the business and duties and work that is done for the business.

The correct valuation approach for many businesses is often a combination of several approaches. Financial experts commonly incorporate multiple methods when establishing value, particularly in more complex situations.

Which Way to Go with Your Business

Once you have completed the business valuation, you need to decide on what course of action you and your ex want to take.  These are some decisions you will need to make: :

  1. Are you amicable enough that you can both continue working in the business? A new business contract should be written reflecting your stakes as individual assets rather than a marital asset.
  2. Will the business be sold and the proceeds divided, along with other marital assets?
  3. Will one spouse own the business and compensate the other as part of the property settlement, based on Illinois equitable distribution law?  In this case, a new contract should be written reflecting both parties’ stakes as individual assets.

 

Finding an Appraiser

There are a number of professionals who can help to determine the value of a business. These experts include:

  • Business appraisers
  • Certified public accountants
  • Business brokers
  • Financial analysts.

Contact the Institute of Business Appraisers to find a qualified individual in your area.

Get Help – Contact Us For a Free Consultation

Every divorce is unique, as is each business situation, so it is most important to have a seasoned divorce attorney on your side who has your best interests at heart. The skilled Illinois divorce attorneys at Wolfe & Stec, Ltd. have extensive experience with business during divorce, and have helped countless families in similar situations.  In addition to assuring your rights to a fair distribution of business assets, we will fight to protect your spousal rights and personal assets and guide you through each step of the divorce and post-divorce period.

For a free initial consultation with an experienced and compassionate DuPage County divorce lawyer, contact us online or call 630-305-0222.

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