The Cost of Doing Business: Business Valuation in Divorce
Owning a business is extremely hard work, but it can be very rewarding, both personally and financially. Unfortunately, this success can be in jeopardy when going through a divorce in Indiana. Fortunately, Indiana divorce laws regarding property give guidance on how to divide a business and its assets. These laws aim to have property division in Indiana divorces be equitable and fair to both parties. A business valuation in divorce can give you an idea of how much your business is worth.
Business valuations for divorces are a particular part of the divorce process for which you need experienced divorce counsel. For help protecting your business interests, contact an experienced Indianapolis divorce lawyer at Keffer Hirschauer LLP.
Indiana’s One-Pot Rule and the Impact of a Business Valuation in Divorce
To understand how the court will treat your business in divorce, it is important to know how Indiana classifies and divides marital property. Indiana follows the one-pot rule when determining which property is considered part of the marital estate. For help determining what assets are required to go into the pot, contact an Indiana divorce attorney.
Protecting your interests means learning what to expect and how to prepare for divorce. This includes being prepared for business valuation in divorce. By understanding the one-pot rule, what Indiana law says about dividing marital assets, how to identify marital assets, and the moving parts of business valuations—and by working with an experienced Indianapolis divorce lawyer, you can protect your future moving forward.
Indiana Divorce: What the One-Pot Includes
After deciding to pursue a divorce, it is smart to understand what assets are considered marital property and thus subject to division during the divorce. Indiana defines marital property to include property:
- Owned by either spouse individually or together before the marriage
- Acquired by either spouse after the marriage and before the separation
- Acquired by the spouses together
Whether the property is owned by a spouse individually or with the other spouse, you must report all assets to the court. An Indiana divorce attorney from Keffer Hirschauer LLP can help you identify all the assets you need to report.
How The Pot is Divided in an Indiana Divorce
Under Indiana Code § 31-15-7-5, the court makes a presumption that equal distribution of the property held between married parties is fair unless one party rebuts this assumption. The party challenging equal distribution must provide evidence showing that an equal division is not just and reasonable. This evidence can include:
- Contributions of each spouse in acquiring the property, whether income was received for the contributions or not
- Property being acquired prior to the marriage or through an inheritance or gift
- Economic conditions of either spouse when the property division becomes effective
- Each spouse’s actions regarding the property during the marriage, such as attempts to dissolve or dispose of property
- Each spouse’s earning ability related to the final property division and property rights in the divorce
Under the one-pot rule, when the court allocates property to one spouse, it must also allocate property of approximately equal value to the other spouse. However, in some circumstances, an Indianapolis divorce lawyer can help you argue that it should distribute certain property from the marital pot without an equal offset to the other spouse. The court may grant this request for reasons like these:
- The individual spouse owned the asset before marriage and continued to hold it individually throughout the marriage
- The individual spouse acquired it during the marriage, and it remained separate from the marriage and other assets
- The individual spouse acquired the property during or before the marriage with non-marital funds
It is important to understand that the marital pot closes when one party files for divorce. Any property acquired after this date is not marital property and generally belongs exclusively to the purchasing spouse.
What Property Considered Marital Property?
Marital property is not limited to just tangible or physical property owned by the spouses. Marital property also includes the following:
- The marital home
- Joint and separate bank accounts
- Retirement assets
- Investment accounts
- Rights of action (like a pending civil lawsuit seeking damages)
- Intellectual property rights
- Collections like artwork
- Businesses owned by the spouses
In a divorce, each spouse typically assigns a monetary value to each item of property. Appraisals can help determine the value of real property such as homes, vehicles, or even items like artwork owned. Certain assets, including businesses and retirement assets, can be difficult to evaluate and may require the expertise of a professional, such as an actuary or CPA.
How to Perform Business Valuation in Divorce
Due to Indiana’s divorce law recommending an equal division of property, it is essential to understand business valuation in divorce and value a business appropriately. Without a proper valuation, one spouse may receive less or more than their fair share of the business. There are several ways to value a business, but choosing the best one for your situation requires consultation with an experienced Indianapolis divorce lawyer. Below are short descriptions of some common business valuation methods.
The simplest way to value a business is the market capitalization method, but it is only available when the business ownership is comprised of publicly traded stock. To reach the value under market capitalization, the number of issued shares is multiplied by the current stock price, and the total reached is the business’s overall market value.
Unfortunately, market capitalization valuation is generally not available to a small business owner because most small businesses that are incorporated do not have publicly traded shares. Instead, small business owners must choose another option, such as calculating the business’s revenue or earnings for their business valuation in divorce.
The Revenue Method
Many small businesses are not incorporated or, if they are, their shares are not publicly traded. For such businesses, the revenue provides another way to estimate the value of the company. The value is determined by observing revenues over a period of time and taking into account other factors contributing to the revenue, including the economic environment. This method often provides a ceiling value, which may or may not serve both parties’ purposes in the divorce.
Looking at Business Earnings
The most accurate way to value a business is by examining its earnings over a period of time. The final number is easily understandable and provides a clear snapshot of the business’s success and longevity. Earnings also work well because people who wish to obtain an interest in a business care most about the profits and future profits.
The Liquidation Method
Another method of business valuations for divorce requires looking at the business’s value should it be sold. This method considers all the outstanding liabilities the business has, which decrease the final value.
Spouses may disagree about which method should be used to perform the business valuation in divorce. Each method may suit one spouse’s circumstances better than the others, and rarely would two methods provide the same number. Regardless of the method chosen, it is essential to have Indianapolis divorce attorneys represent your interests.
Important Components of Business Valuation in Divorce
Every business valuation in divorce has several moving parts, each being a potential point of dispute. These include key dates for determining the value, the relevant evidence needed to establish the business’s value, or which (if any) discounts to apply to the valuation. An experienced Indianapolis divorce lawyer can spearhead the valuation process and bring in appropriate experts to ensure your business is appropriately valued.
The Date of Valuation
Indiana trial courts have significant discretion when valuing property in divorce proceedings. Once the court or parties identify all marital property, they can set any date for determining the business’s valuation anytime from the commencement of the divorce to the date of the hearing or conclusion of the case. The date the court chooses can greatly impact the valuation and how property is ultimately divided.
Whether the date is early on or further in the future, it can significantly impact the business’s value. Should the date be far in the future, there is risk of significant change in the valuation of the business between the filing of the divorce and the valuation date. Likewise, there is a chance the business value could significantly change between the date of valuation and the hearing. Ultimately, the parties—or the court—must choose a date to be used by both sides in determining the value.
Goodwill is the value of a business or practice that exceeds the combined value of the business’s assets. One example is enterprise goodwill, which is an asset of the business and thus subject to division upon divorce. However, there can also (or instead) be personal goodwill, which is value attributable to the skills, reputation, or involvement of a particular person or employee. That type of goodwill generally is not subject to division in a divorce.
Whether your business has goodwill and determining its type requires a professional’s in-depth and fact-sensitive analysis. Keffer Hirschauer LLP works with experts experienced navigating the complexity of valuing goodwill.
The Application of Discounts
A business valuation generally starts by estimating the value of the business as a whole. However, certain factors may require applying a discount to that number. An obvious example is when a spouse only owns a portion of a business. In that case, the total value of the business would be discounted by the amount the spouse does not own to determine the spouse’s ownership interest. In other examples, a discount might be applied because the business lacks marketability or because the spouse owns but does not have control over the business.
In sum, business valuation in divorce is complex. Between the valuation date, disputes about whether to factor in goodwill, or determining whether a discount should apply, you need an experienced divorce team to protect your interests.
How to Protect Your Business Interests in Divorce
When you work hard to build a business or professional practice, it is difficult to think about losing it or part of it in a divorce. Fortunately, there are steps to take to protect your business interests. The most common ways are contractual, using prenuptial or postnuptial agreements or buy-sell agreements.
Prenuptial or postnuptial agreements are contracts between spouses signed before the parties are married (a prenuptial agreement) or after they are officially married (a postnuptial agreement). These agreements can outline how any assets will be divided and can even declare that one spouse will receive little to nothing of the assets in the event of divorce or the death of the other spouse.
A buy-sell agreement is ideal when both spouses have an ownership interest in the business. This agreement can dictate a spouse’s exit from the business and describe the financial compensation to be received upon departure and/or disposition of any ownership interest. Additionally, if just one spouse has ownership status in the company, a buy-sell agreement can protect the business by pre-defining the owner-spouse’s interest in the event of divorce.
Another option for business owners is to place the business in a trust. By placing the business in a trust, the trust is technically the owner and not the spouse whose business it is. It is no longer considered a marital asset and would not be subject to division during a divorce.
When Do You Need an Indianapolis Divorce Lawyer?
Before becoming overwhelmed with the emotional process of a divorce, you need to understand what could happen to your business interests and how to protect them. The Indianapolis divorce attorneys at Keffer Hirschauer LLP can help you understand your options regarding business valuation in divorce—and more—and develop strategies to protect your interests. For a free consultation, call us today at (317) 857-0160 or complete our online contact form.