Business Valuation During Divorce

Property division and maintenance can become heated, emotional controversies during a divorce. They are particularly sticky when a closely held family-owned business that has been a substantial source of income for a married couple is at stake. New Jersey is an equitable distribution state, which means that the court will divide marital property based on what is fair and reasonable, rather than automatically impose an exactly even split. However, reasonable people may disagree about the value of a business, and the task of valuing it is intricate and challenging, which is why consulting a Middlesex or Monmouth County business valuation lawyer is important. An experienced family law attorney at Goldstein Law Group can help you select and advocate for an appropriate business valuation method during a divorce proceeding.

A buy-sell agreement or a prenuptial agreement may help establish the value of a business or a spouse's interest in it. However, in many cases, a forensic accounting expert retained by your attorney, your spouse's attorney, or the court will determine the value of a closely held business. The expert will examine the business' books and records, as well as deposition testimony provided by the parties.

Valuing small, closely held businesses can be the most subjective area of valuation when splitting up marital property because there is no concrete definition of the "fair value" of a business. Determining fair value requires judges to consider proof of a business' value by any methods that are considered acceptable in the financial community and otherwise admissible in court. While IRS Revenue Ruling 59-60 includes guidelines for business valuation, the process is fact-sensitive and varies from case to case. Factors the court may consider are the nature of the business, the economic outlook of the business and the specific industry to which it belongs, the book value of the stock, the financial condition of the business and its earning capacity, its dividend paying capacity, goodwill and other intangibles, stock sales, and the market price of competitors. A business valuation attorney in Monmouth or Middlesex County can advise you on how these factors may apply to you.

In New Jersey, courts generally permit three ways of valuing closely held businesses for purposes of property distribution: the income method (also known as the capitalization of income method), the market method, and the cost approach method. None of these formulas applies to all circumstances, and they don't necessarily produce the same results. Instead, each is appropriate to a different situation.

The capitalization of income method is probably the most commonly used method in a divorce. When this is used, a forensic accountant determines the fair value of the income stream to the enterprise’s owner. This involves determining the total financial benefit that is created by the business operation by assessing wages and distributions, among other things. The financial benefit minus the reasonable value of the owner's services (known as “reasonable comp.”) is capitalized into an estimate of value. The business evaluator will employ a capitalization rate (the “cap rate”) to the income data after subtracting the reasonable comp, as part of the process in arriving at the value of the business for equitable distribution purposes.

At Goldstein Law Group, our divorce lawyers retain knowledgeable and skilled forensic accountants to help small business owners throughout Middlesex County in connection with a divorce and any attendant business valuation, cash flow analysis, and lifestyle analysis of the parties that needs to be conducted. We understand how challenging it is to see your marital assets divided, and we provide ethical representation to those with high-value assets. The partners of Goldstein Law Group possess prior professional experience that uniquely qualifies them in business evaluations and equitable distribution issues of business interests in a New Jersey divorce action. You can contact us at 732-967-6777 or by completing our online form. Our Middlesex and Monmouth County business valuation attorneys have assisted individuals from Rumson, Red Bank, Old Bridge, East Brunswick, Marlboro, Manalapan, Freehold, and other communities.