In some Maryland and District of Columbia divorces, a small business might be included in the couple’s marital assets. If so, then the small business will be subject to the legal requirement that it be “equitably” divided as part of resolving the divorce.
In theory, the divorce court could actually divide ownership of the business between the spouses. However, more often, the divorce court includes the value of the business in the total value of all assets, and that total value is what is to be equitably divided. Various assets that are not easy to divide — like the marital home or a small business — are “traded” to achieve the equitable division of the total set of assets. In some rare cases, the court could order the business to be sold. This then allows equitable division of the proceeds that result from the sale. However, that is rare since selling a small business is typically not easy and can be time-consuming. Further, often a small business is a main source of income for the divorcing couple. Thus, forcing a sale of that business can be financially devastating and counter-productive to protecting the earning potential of the spouses.
In any event, in most cases, the divorce court must have a value set for the small business. The spouses could agree on that value, but often, the valuation of the business is disputed. In this article, we will briefly — and very simplistically — discuss some of the common valuation methods for small businesses.
In this article, we will assume the small business is owned entirely by one of the spouses. This avoids complicating issues that might involve agreements by and between owners who are not party to the divorce proceedings. Such agreements might include buy-sell provisions that limit who ownership units can be sold to, etc. Further, where a spouse is only a part owner, valuation becomes even more complicated since, typically, valuation discounts are imposed based on control of the business, ease of selling the ownership units, etc.
Common business valuation methods include two forms of income method, asset valuation and comparable market valuation. In very simple terms, these can be summarized as follows:
- Comparable market valuation approach: similar to a “comparable” approach to real estate valuation, this method compares recent sales of similar businesses in the same geographic region, adjusting for various factors.
- Asset valuation approach: this approach bases valuation on the fair market value of assets and liabilities of the business as though the business were being liquidated; generally, this method excludes questions of income and expenses from the valuation.
- Capitalization of earnings/return on investment (“ROI”): here, the first assumption involves a statement of a desired rate of return on investment of a certain amount, looking at alternatives available in the investment marketplace; for example, if a low-risk investment yields a 3% ROI, then valuation hinges on how much would this business cost to buy so that it generates a 3% annual ROI on the investment over the designated investment term.
- Discounting cash flow valuation: this is the most complicated valuation method; in simplistic terms, the cash flow of the business is estimated for each year in the future (three to five years going forward); each year’s expected cash flow is discounted to current value; the discounted values are combined for an estimated current value.
As can be seen, valuation is complex. None of these methods will be presented to the divorce court by the spouses or lay witnesses. The divorce court will expect that trained and experienced valuation experts will provide their opinions (and reports) on valuation with a full exposition of valuation methods used, etc. This is one reason that high-net-worth Maryland/D.C. divorces that involve small businesses can become so expensive.
Maryland And D.C. Family Law Attorneys
Contact the seasoned and experienced Maryland and D.C. family law lawyers at The Law Offices of Thomas Stahl for more information. We have the skills and expertise you need. We have proven experience with family law for Maryland and the District of Columbia. Schedule a consultation today or call us at (443) 331-2770. We have offices in Columbia, MD, and Washington, DC.
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