When you are going through a divorce, one of the issues with which you may have to deal is the division of property.
North Carolina law provides for the division of property through Equitable Distribution. The equitable distribution statute allows the court to divide all marital property and divisible property.
Businesses owned by the parties are property that can be divided by the court. Like a house or a car, a business can be valued by a business valuator and distributed to one party or the other. However, unlike a house or car, the valuation of a business is generally much more complex.
There are several different ways in which a business can be valued. Some of the ways are:
1. Asset-Based Approach
This approach values all of the assets of the business and subtracts from that value any debts owed by the business. Assets of the business may include tangible property (buildings, cars, office furniture, inventory, money in the bank, etc.) and intangible assets (intellectual property rights owned by the business, copyrights, patents, customer lists, contracts). Debts of the business may include credit card bills, mortgages, money owed to creditors, and accounts payable.
2. Earning Value Approach
This approach is premised on the assumption that the buyer of a business is not looking simply to buy the assets of the business—but is buying the expectancy of future income the business will generate. This approach looks at the business’ historical earnings (net profits) and bases the value of the business on the expectancy of continuing to receive that income. For example, if the business has traditionally made $10,000/year in net profit, perhaps the buyers would purchase the business for $30,000—3 years’ worth of profits… knowing that, after three years, they will have made a return on their investment.
3. Market Value Approach
This approach attempts to compare your business to other similar businesses that have sold—making adjustments, as necessary, where there are differences between your business and the similar businesses that sold. (This is similar to using “comps” in determining for how much your house will sell.)
The business valuator will generally use several different approaches and combine them based on the type of business, the nature of the business, and other relevant factors.
A business can be the largest and most important asset of the marriage. Because of that, it is important to start the process of business valuations early, to ensure that your attorney and the business valuator have all the information they need to value the business. The process of gathering the documents necessary to do a business valuation can be difficult—especially if it is the other party who runs the business. At Rik Lovett & Associates, we have experience in dealing with business valuations. We will work with you and the business valuator to make sure that our expert has all the documents he needs to do a business valuation that properly values your marital share in the business.