If you and/or your spouse have a small business, the business interests may be subject to division in a divorce. Massachusetts calls for equitable division of property, which means fair but not necessarily equal.
Explore the factors to consider in business valuation to inform your divorce proceedings.
Book vs. market value
There are two common business valuation methods. The value indicated in the company’s books is aptly called the book value. This consists of the original cost of the company’s assets minus depreciation or plus increase in market value. As for market value, the term describes the amount you could expect to get for your business from a buyer on the open market. To estimate this number, the judge may look for trends in your company’s income and assets over the past five years and use that to project the income over the next five years.
Business assets and debts
Typically, the starting point to determine the value of a business too small to have an established market value is a review of the assets and debts. You should provide the court with a full accounting of all the business’s intangible property, such as client goodwill, market reputation, software and intellectual property. Tangible property includes equipment, inventory and cash assets of the business.
The judge will total the tangible and intangible assets and then subtract the business debts to estimate a fair value. Debts may include outstanding loans, payroll or any other current financial liabilities.
You should also provide information that the court can use to calculate the net profit of your business. This consists of the business’s annual income minus its operating expenses. You can also calculate net profit on a monthly, weekly or quarterly basis.
You may consider hiring a professional appraiser to ensure that the court considers the fair value of the business when dividing property. Avoid relying on an outdated valuation, especially if your divorce takes months or years to settle.