Every business owner should have a current business valuation so that they know what their company is worth and where their company fits in the landscape of their market. However, there are times that a valuation is needed to settle a divorce.
Georgia is an “equitable distribution state,” meaning that all marital property acquired during the marriage is subject to division. Furthermore, Georgia case law makes it clear that business may be divided upon divorce if deemed marital property.
The business is usually given to one spouse while the other spouse receives marital assets of equal value. If you are in this situation, you’ll first need to assemble a team of experts, including a divorce attorney who has had experience with the division of business interests, a third-party independent business analyst, a Certified Divorce Financial Adviser®, and tax adviser.
To start, a business valuation includes an in-depth process that estimates the economic value of an owner’s interest in a business. Frequently, business owners start by asking for a multiple of EBITDA (earnings before interest, tax, depreciation, and amortization) thinking they’ll figure out a valuation from there; however, no business owner has ever thought of their business as “average,” and all market factors reflect an average transaction value. There are many factors that need to be considered, such as, the type of company, market value, investment value, growth potential, tax laws, potential discounts and, of course, the individual circumstances of each business owner.
When there is a disagreement on the value of the business, a valuation is a must, because a valuation can account for all aspects, from a review of the current management to a forecast of economic trends, to a look at intangibles, such as goodwill.
Business valuation analysts usually take one or a combination of the following approaches when they value a business: an income-based approach, an asset-based approach, or a market-based approach. The asset approach calculates a value using a simple formula: market value of assets minus market value of liabilities equal the business value, where assets include both tangible and intangible assets. Unfortunately, the bank doesn’t tend to lend money on “goodwill.” Should the spouse who is keeping the business need a loan to purchase the business interest from the other spouse, a valuation based on assets may not reflect the true value of the business.
The market approach calculates the value of a business by comparing it to similar businesses that have been sold. However, if there are no similar businesses that have recently been sold that can provide an accurate comp, this can be difficult. The income approach uses historical information and formulas to predict expected cash flow and profits in calculating the value of the business. The formulas used consider future benefits as well as the rate of risk or return. This is the most common approach used to determine the value of a business, especially a fast-growing enterprise.
Divorcing business owners may also want to enlist the help of a Certified Divorce Financial Analyst® (CDFA®) to ensure that the numbers work in everyone’s favor. A tax adviser can also help since the spouse who ends up selling his or her interest in the company is now forced into a potentially taxable situation because he or she had to realize the gain from the portion of the property being sold. A $1 million payout for the interest stake may only be worth $800,000 after tax. This illustrates how under certain circumstances an equal distribution may not be a fair distribution. The value of an asset may vary depending upon who receives it.
If you have questions on how a divorce may impact your business, contact the experts at Henssler Financial: