How a Business Is Valued in a Divorce: A Guide for the Spouse Who Doesn't Run It

A business is usually valued by a qualified professional using one or more general approaches: income, market or asset-based. Which approach fits, and what the resulting number means, may depend on the business and your state. If you do not run it, the useful questions are what the valuation assumed, who prepared it, and how it compares after tax.

A business interest may be the largest asset in a settlement and the one the non-operating spouse can see least of. It may be a family company, a professional practice, or a share of a partnership. If your spouse runs it, the financial picture may live in their head, their accountant's files and a set of tax returns you have rarely opened. That is a common position, and it does not mean you cannot follow the numbers once they are set out in plain terms.

This guide is general education. It is not legal, tax or valuation advice, and it is not a valuation of any business.

Why a business is often the hardest asset to compare

A bank balance is a fact. A business value is an estimate, and it is built on assumptions. That makes it harder to compare with the other things on your list in three ways:

• There is no statement. There is no balance you can read off a page. The figure comes from a professional's judgment about earnings, risk and what a buyer might pay.
• It may not turn into cash. A share of a business may produce no spendable money unless the business pays distributions or is sold, and a sale takes time and may carry costs and taxes.
• It may depend on the person running it. Some of a small business's value may rest on the owner's own skills and relationships, which is a point that valuation professionals and courts may treat differently depending on the state.

The first step is the same as for any other asset: get it on the page with a date and a source. How to divide assets in a divorce covers the full list. This guide goes deeper on the one item on it that usually needs an expert.

The general ways a business may be valued

Valuation professionals generally use one or more of three families of method. These are described here at category level so you can follow a report, not so you can do the work yourself.

• Income approach. This looks at the money the business is expected to earn and converts it into a value today, taking into account how risky those earnings are. It is often used for businesses that make steady profits.
• Market approach. This looks at what comparable businesses have sold for, or at published information on similar sales, and adjusts for the differences. It depends on how good the comparisons are.
• Asset-based approach. This adds up what the business owns, subtracts what it owes, and arrives at a net figure. It is often used where the business is mostly property or equipment, or where it is not earning much.

A report may use one approach or weigh several. Whichever it uses, it will rest on a stated valuation date and a stated standard of value, which is the definition of "value" being applied. Which standard applies, and whether certain adjustments are allowed, is set by your state's law and may differ from state to state. That is a question for your attorney.

Who does the valuation, and who chooses them

Valuation is done by a qualified professional, not by the spouse who runs the business and not by a general financial consultant. People who do this work may hold credentials from professional valuation organizations, such as the ABV, ASA or CVA. It is reasonable to ask which credential an expert holds, what training and experience they have with businesses like this one, and whether they have worked on divorce matters.

How the expert is chosen varies. Spouses may agree on one expert to share, each may hire their own, or a court may appoint one, depending on your state and your circumstances. Who pays for the valuation is also a matter for the agreement or the court. Your attorney can explain how this works where you live. If you are the spouse who does not run the business, ask early whether you will have your own access to the expert's questions and to the documents they rely on.

Documents to gather

A valuator may need a good deal of paperwork, and so may you if you are reviewing someone else's work. If you are able to request or collect these, it may help to have them in one place. Your attorney can tell you what you can ask for and how.

• Business tax returns, generally for several years, along with the owners' personal returns
• Financial statements: profit and loss statements and balance sheets, with any bank and loan statements
• Records of what the owner is paid, including salary, bonuses, benefits and personal expenses paid through the business
• Any buy-sell agreement, operating agreement, partnership agreement or shareholder agreement
• Records of any outside investors, partners or co-owners, and who holds what share
• Equipment, property and lease information
• Any earlier valuation, offer to buy, or loan application that stated a value for the business
• Records of any money put into the business during the marriage, or taken out of it

The documents you need before you file covers the wider set of paperwork for everything else. If you have handled little of the money so far, When your spouse handled all the money may be a better place to begin.

Why two valuations can differ

Two qualified professionals can look at the same business and reach different numbers. That does not mean one of them is careless. It usually means they made different choices at points where judgment is involved. Common ones include:

• The valuation date. A value on the date of separation can differ from a value on the date of trial or settlement.
• Owner pay. If the owner pays themselves more or less than a replacement manager would cost, the expert may adjust the earnings, and different adjustments give different results.
• Personal expenses. Some owners run personal costs through the business. Whether and how those are added back changes the earnings figure.
• Forecasts and risk. The income approach depends on assumptions about the future and about how risky the business is. A small change in those assumptions can move the answer a lot.
• Discounts. Experts may apply discounts for a minority share or for a share that is hard to sell. Whether those discounts are allowed in a divorce depends on the state.
• Goodwill. Some states treat the value tied to the owner personally differently from the value tied to the business itself.

As a purely hypothetical illustration, with figures chosen only to show the arithmetic: if one expert reaches $600,000 and another reaches $900,000, the gap is $300,000. In a settlement where the business is being traded against other assets, that gap could change who ends up with more spendable money. That is why the assumptions behind the number matter as much as the number.

Questions worth asking about any valuation report you are shown:

• Who prepared it, what are their credentials, and who hired them?
• What is the valuation date?
• Which approach or approaches were used, and why?
• What was assumed about the owner's pay and about expenses paid through the business?
• Were any discounts applied, and on what basis?
• What documents was it built on, and was anything not provided?
• Is the report a full valuation or a more limited estimate?

Putting the business next to cash, the house and retirement money

Once there is a number, the next step is the same one that applies to everything else: compare it on an after-tax, like-for-like basis. A business value on paper is not a cash balance. The questions that matter are what it would be worth to you after tax if turned into spendable money, what it costs to keep, and how quickly you can reach it.

A blank worksheet like the one below is enough to keep the comparison honest. Fill in the figures from your own documents and advisors.

As a purely hypothetical illustration, with no tax rate or return assumed: suppose a business interest is valued at $400,000 and a savings account holds $400,000. The two figures match, but the savings can be spent tomorrow. The business interest may pay nothing unless the business makes distributions, and turning it into cash through a sale may take time, cost money and may have tax effects. Matching numbers do not mean matching value to you.

For the tax side, the IRS explains that, generally, no gain or loss is recognized on a transfer of property between spouses, or to a former spouse if the transfer is incident to the divorce, and that the person who receives the property generally takes over the other person's tax basis. A transfer may not be taxed on the day it happens, but a tax cost may follow the asset and arrive when it is later sold. See the property settlements section of IRS Publication 504. How this applies to a business interest, including how it is structured, is a question for a tax professional.

Retirement money has its own rules. How to split retirement accounts in a divorce explains how a 401(k) and an IRA may be divided. The house comparison is in Should you keep the house in a divorce?, which also shows how to work out what it may cost on one income. If you are choosing between keeping the house and taking other assets, it may help to run both comparisons with the business figure in the same worksheet.

Who to ask what

Different questions belong with different people.

Your attorney advises you on the law: whether the business is treated as marital or separate where you live, how your state treats goodwill and discounts, how the expert is chosen and paid, and how the agreement is written. I am not an attorney and I do not give legal advice.

A credentialed valuation professional values the business. This guide does not value it and I do not provide valuation advice.

A tax professional answers how the transfer or sale of a business interest may be taxed in your situation.

The numbers work is the part in between: building the full list, laying the business interest next to everything else on a like-for-like basis, and showing what each option may cost to hold and what your finances may look like afterward.

Ask before you agree

Before you sign anything that gives a business interest a value or trades it against other assets, it may help to be able to answer yes to each of these:

• Has a qualified, credentialed professional valued it, and do I know who hired them?
• Do I know the valuation date, the approach used and the main assumptions?
• Have I seen the documents the valuation was built on, or been told what was not provided?
• Do I understand why this number may be higher or lower than another expert's?
• Have I compared it with cash, the house and retirement money after tax, not at face value?
• Do I know whether I would actually receive cash from it, and when?
• Has my attorney explained how my state treats this kind of business interest?
• Has a tax professional looked at how the transfer or sale would be taxed?

If any answer is no, that is a question to ask before the agreement is final, not after.

Frequently asked questions

How is a business valued in a divorce?

A qualified valuation professional generally uses one or more approaches: an income approach, a market approach or an asset-based approach. The report states a valuation date and the assumptions behind the number. The rules for what is included and how it is treated depend on your state, so ask your attorney how they apply to your situation.

How do you value a small business for a divorce?

Small businesses are often valued by a credentialed professional who reviews several years of tax returns and financial statements, adjusts for owner pay and personal expenses, and applies one or more approaches. Because so much depends on the owner, the assumptions deserve attention. A valuation of this kind is not something to estimate on your own from a rule of thumb.

Who chooses the business valuation expert?

It depends on your state and your case. Spouses may agree on one expert, each may hire their own, or a court may appoint one. Who pays is also decided by the agreement or the court. Your attorney can tell you how it usually works where you live.

Why might two business valuations be different?

Experts make judgments about the valuation date, the owner's pay, personal expenses, future earnings, risk, and whether discounts apply. Different choices at those points can produce different numbers. Asking each expert for their assumptions may help you see where the gap comes from.

Is a business owned before the marriage still part of the settlement?

It may be, depending on your state. A business started or owned before the marriage may be treated as separate, but growth in its value during the marriage, or marital money and effort put into it, may be treated differently. This is a legal question for your attorney.

Do I need a divorce financial consultant to value a business?

No. A consultant does not value the business and you are not required to have one. Some people find it useful to have someone set the valuation next to the other assets on an after-tax basis and model the options while their attorney handles the legal side. The first conversation with me is complimentary and confidential, and you are under no obligation.

What to do with this

Start with what you can gather: the tax returns, the financial statements, any agreement that governs the ownership, and any earlier statement of what the business is worth. Then take the questions above to your attorney, and ask who will prepare or review the valuation.

If you would like the comparison done alongside that, this is the work I do. Book a consultation: the first conversation is complimentary and confidential, and you are under no obligation.

This is general education, not advice about your situation. It is not legal, tax, investment or valuation advice. Property rules and tax rules vary by state and by circumstance, so check yours with your attorney, a credentialed valuation professional and a tax professional.