What Questions Should I be Asking When I Need a Business Valued for Divorce?
When a closely-held business is one of the assets of a divorcing couple, many questions come up. In contrast to assets such as investment accounts or real estate, figuring out the value of a business can be quite complicated. Issues such as the industry involved, the revenues of the business, and the structure of the business are just a few of the relevant factors in determining value. In addition, if the business is one of the most valuable assets of the divorcing couple, it can be challenging to figure out how best to distribute that value between the parties.
In Lauren’s case, she and her husband started a construction business shortly after their marriage. They both contributed savings to capitalize the business, and each took on a major role – Steve working on site, Lauren handling the paperwork for the jobs and the bookkeeping. The company, which is organized as an LLC, is titled in Steve’s sole name, and he signs all of the contracts and loans.
Lauren took a leave of absence from the business when the parties’ first child was born, and returned ten years later when their youngest was in school full time. Since then, she has worked 2/3 time in the business so she can be home when the children get out of school.
Lauren is the party initiating the divorce, but she and Steve are in agreement that they want to keep the process as amicable as possible and to keep the costs of the divorce as reasonable as possible. Lauren doesn’t feel that it will be workable for both of them to continue to be involved in the business after the divorce.
When Lauren had her first meeting with her attorney, her questions included:
- What am I entitled to? Did I make a mistake in letting Steve title the business in his sole name? Because Steve has put more time into the business over the years, will my share be reduced?
- What is the business worth? How will that be figured out? What about the possibility that Steve has taken actions to diminish the value of the business – would we be able to tell? What about construction projects that are only partially completed or are still on the drawing board – how will the profit from those projects be captured in the valuation?
- If Steve maintains ownership of the business, how will I receive my share of the value?
- Are there ways to keep costs down and to keep the divorce process as amicable as possible?
In their first meeting, Lauren’s attorney validated that she was asking all of the right questions. They walked through the financials of the business, and Lauren’s attorney laid out options for how an expert in business valuations could be of assistance (ranging from a smaller/cost-limited role to closely engaged throughout the process), and explained that an expert could also help Lauren identify additional documents and information that would be relevant to determining the value of the business. Lauren and her attorney developed a detailed initial strategy, and by the time she left the meeting, Lauren felt reassured that, even though it may be complicated, she would be able to ascertain a fair value for the business and be on solid footing to make a deal with Steve.