The Process of Business Valuation Methods in Divorces

By Michael DiFalco
Partner

Many divorces involve one or both spouses having valuable business assets and interests. When this is the case, these assets and interests must be evaluated during the accounting of assets. As you might imagine, the processes and methods involved in business valuations are typically more complex and involved than the methods and processes used for personal assets. 

Time of Business Formation

The time in which the business came into existence is important. New York law holds that property acquired during marriage is considered marital property. This rule applies to personal and business property. It is likely that any gains a business made during a marriage must be shared with the spouse. However, in most cases, earnings prior to marriage need not be shared. A business established prior to the marriage will still be subject to equitable distribution, but may be limited to an appreciation claim based on the difference in value at the time of divorce and the time of marriage, if same can be established.   

Accurate Business Valuation

An accurate business valuation is essential to a fair divorce. The total worth of a business or interest in a business can heavily influence many rulings that come out of a divorce, such as child support and spousal support rulings. 

For ultimate legal and financial protection, spouses should always have an experienced divorce attorney representing them. Attorneys have the duty to protect and advance their client’s interests and fight hard to get proper business valuations during divorce proceedings. They consult with certified public accountants (CPAs) and other professionals to arrive at proper valuation figures for their clients. 

Standard of Value and Methods

Business valuations require the use of a value standard to complete the process. A value standard is essentially a set of circumstances used to give a business a specific valuation. In New York divorce proceedings, the fair market value of an asset is often used to determine its value. 

Fair Market Value

Fair market value refers to the price a certain asset would fetch if a reasonable buyer and seller were engaged in a transaction for the asset. 

A reasonable buyer and seller are parties who have a reasonable understanding of all pertinent facts and issues related to the asset and the sale. They are not under duress or coercion, and they have a firm grasp of the state of the market and circumstances that influence a business’s valuation. 

During appraisals at fair market value, the appraiser may apply one or more various discounts, including lack-of-marketability discounts (DLOM) or discounts for lack of control (DLOC). These discounts can significantly impact the ultimate valuation assigned to the business.

Income Approach

Another approach used during business valuation is the income approach. This method identifies the future possible income stream a business could reasonably generate and assigns the income stream a present-day value. The use of complicated data and historical reports is necessary when using this method of valuation. 

Date of Valuation

During valuation, various questions are posed and answered to allow parties to determine as fair a market value as possible. For example, the question: “What date should be used to determine the value of the business?” often arises. Values of businesses can fluctuate greatly between dates. In a good year or a bad year, a business could be up to and over 25% or 50% more or less valuable than on another date.

This potential volatility makes it essential for parties to seek experienced legal counsel before entering into divorce and business valuation proceedings. 

Contact the Family Law Attorneys at Aiello & DiFalco for Help

Business valuation methods can ultimately favor one party in a divorce over the other. Parties need skilled and experienced counsel to advance and safeguard their interests during the valuation process. Aiello & DiFalco in Garden City, NY, will aggressively protect you and any business stakes or right to support you may have. Do not hesitate to call for a consultation.

About the Author
I am a partner at Aiello & DiFalco LLP, and my priority for my clients is to guide them through an arduous court case to provide them with the opportunity to write the next chapter in their life. I tailor my approach to each client’s priorities and positions, and to the extent that matters can be predicted, I will always provide a realistic perspective of how the law could be applied to the particular facts and circumstances of a case. Since I thrive on helping people and solving problems, I bring an optimistic and positive approach to practicing in a very difficult area of law. With more than a decade of experience handling hundreds of cases, I have the ability to get results on the issues my clients view as priorities. When cases or certain issues cannot be settled, I have a solid record of success at trials, hearings, and on appeals. Feel free to contact me for a free initial consultation, I am always available to help.