If you consider divorce, the value of your family business could be a point of contention between you and your spouse. Along with potential sentimental attachments, you must know what your marital assets are worth before you can divide them fairly.
A court may distinguish between assets you actively control and passive assets that are subject to market fluctuation. For example, your business valuation date may be your date of separation. Meanwhile, your trial date might control the valuation of your passive assets, such as your investment portfolio.
This approach can protect the interests of both people involved, since a business owner could potentially increase their profit margin or mismanage funds during separation. However, there is no guarantee of how a court will rule – especially in a volatile market.
Market fluctuation could significantly affect the value of marital assets
During uncertain economic times, your valuation date can make a big difference in your divorce settlement. Take, for example, the case of a couple in New Jersey.
In this appeal, the value of the husband’s New York Stock Exchange seat almost doubled in value between the date the couple filed for divorce and their trial. Since neither he nor his wife directly contributed to the increase, the courts determined the valuation date as that of their trial.
What factors into a business valuation?
Financial professionals utilize various approaches to examine an organization’s market value. Common business valuation methods include:
- Total market value of the company’s outstanding shares of stock
- Predicted cash flow weighed against the current financial investment
- Price-to-earnings ratio, often compared to similar competitors
- Book value of total assets minus liabilities
- Multiples of revenue, which predicts a range of values between business liquidation and acquisition ceiling
Regardless of the method used, the fair value of your business may be subjective. At the same time, it may be difficult to determine how a court would differentiate between active and passive assets during a season of unprecedented oversight.
Protecting your interests is imperative for your future. Therefore, before you file for divorce, you would be wise to seek counsel about how, or when, the market might help you reach a favorable settlement.