How will the valuation of a business impact a divorce settlement?

Getting a divorce is already stressful, and when you own a business, it can be even more complicated and confusing. Complex property division in Colorado can lead to a long, drawn-out process when it comes to reaching a settlement in a divorce. Understanding the ways that your business could be valued may help you address the issue more quickly.

What is business valuation?

Unlike some assets, such as bank accounts and real estate, a business may not have a straightforward value. In real estate, an appraiser will provide an estimated value of a home, and the bank account value is the balance in the account when your marital assets are settled. Under the law, any property you co-own with your spouse is considered marital property, and this will include a business. Even if you owned your business before the marriage, any increase in value of the business during the marriage would be marital property.

Standard of value

There are three ways that a business may be valued. These include:

  • Asset-based standard
  • Earning value
  • Market value

Also known as book value, an asset-based standard looks at your company balance sheet, lists the assets and deducts the liabilities to determine the business value, also known as a going concern asset-based value. A liquidation asset-based value determines the net cash value if all assets were sold and liabilities paid. Earning value determines future wealth while market value compares your company to similar businesses that have recently sold.

Impact on child support and alimony

One thing to keep in mind is that you could be awarded two amounts using the same business. The business valuation will be used when your property is divided and again to calculate alimony or child support. This is especially true if both spouses were equally active in the daily operations of the business and one spouse will now leave the business due to the divorce. Because that may be your only income stream, the business income will be used to determine alimony and child support.

Hiding assets

Fraud during complex property division is not unusual, especially when it comes to valuation of a business. One spouse might undervalue the assets of a company by understating revenue and overstating expenses. For instance, your spouse may claim that the valued ownership of your company is only $100,000, which means you would receive $50,000 as part of the settlement. After the settlement, your spouse might sell the company for millions, meaning they clearly undervalued the asset during divorce, so you may be able to seek damages for fraud.

When it comes to complex property division, business ownership can be one of the most complicated assets to split. An attorney may help you address the valuation of a company that should be included as part of the marital assets.