Is the Business Marital Property?
When splitting up assets in a divorce, we
must first determine whether the items are separate property or marital
property. In Georgia, property which was obtained during the marriage is marital
property, but separate property, acquired outside the marriage, is
not subject to division. Marital property is divided using equitable division,
meaning the items are divided fairly, not necessarily equally.
In order for marital assets to be divided,
their value must first be determined. While the value of bank accounts and real
estate are straightforward, a small business is much harder to appraise. Whether
a business is marital property depends on factors like ownership history, each
spouse's involvement, and contributions to growth. If the business was owned by
a party before the marriage, only the growth in value during the marriage is subject
to division. Since dividing a business in a divorce comes with unique
challenges, expert assistance is often needed to assign reliable value.
The Role of a Business Evaluator
A business evaluator is a financial
professional who uses specific procedures to estimate the economic value of a
business or ownership interest. When choosing a business evaluator, it is
important to understand their credentials, experience, professional
certifications, and familiarity with divorce cases.
Types of Business Valuations
There are two main valuation options when dividing a business in a Georgia divorce. A calculation of value is a simpler and less expensive method which provides a rough estimate of what the business is worth. This approach works best when both spouses are cooperative and do not dispute the value.In contrast, a full business valuation is a more in-depth process which
is backed by detailed data and analysis. While it is more costly, the full
business valuation is often necessary when the business is complex or when the
spouses disagree on value.
Three Approaches to Valuing a Business
A full business valuation can be performed using three commonly used approaches. The asset approach calculates the value of the business by adding up its assets and subtracting its liabilities. This method is most effective for companies with significant tangible assets, but less useful for service-based businesses.The income approach determines the value of a business by
converting projected future earnings into present-day value, making it ideal
for service businesses or companies with steady income streams. The market
approach compares the business to similar businesses which have recently sold, however,
this method can be misleading if the business carries high debt or has unique
operations which make direct comparisons difficult.
Special Valuation Considerations
Two common adjustments may affect the appraised value of a business. A discount for lack of marketability accounts for the difficulty of selling a business or ownership interest quickly. A discount for lack of control applies when a spouse owns a minority stake in a business and has limited decision-making authority.Personal goodwill is tied to the owner's individual skills, reputation, and relationships, and is often excluded from division in divorce. Enterprise goodwill is linked to the business itself, regardless of who owns or operates it, and may be subject to division. Both discounts, along with the type of goodwill involved, can significantly impact the final value of the business, and should be considered in the divorce settlement.
Dividing the Business in the Settlement
Splitting up a business using an equal (50/50) ownership split isn't practical because
it would likely cause issues and operational disruption. If one spouse wants to
keep the business, it is best to offset the value by awarding the other spouse different
marital assets, such as home equity or investment accounts. When dividing
assets, it is important to consider the tax consequences of each asset in order
to ensure each party receives a fair share of the marital estate.
When dividing property in a divorce, the
division of a business is often one of the most complex issues. It is important
to choose an experienced divorce attorney and a skilled business evaluator to
ensure fairness and accuracy in dividing your marital property.