Divorce can be a complex process under the best of circumstances, but when one or both spouses own a business, the stakes rise significantly. Proper business valuation in a divorce is crucial, as it can impact the financial futures of both parties years down the road. If you or your spouse owns a business and you’re considering divorce, our family law team at Sarno da Costa D’Aniello Maceri Webb LLC can help. Led by Angelo Sarno, our compassionate, tenacious divorce lawyers are well-versed in complex business valuation methods. We’re dedicated to protecting your interests and helping you reach a fair outcome.
Understanding Equitable Distribution in New Jersey
New Jersey is an equitable distribution state, which means marital property is divided fairly, but not necessarily equally. Typically, assets and debts acquired during a marriage are considered marital property. Whether a business is considered marital property depends on various factors, including, but not limited to:
- Whether the business was started before or during the marriage
- How the business was funded and operated
- The financial, managerial, and supportive contributions of each spouse
Even if a business was started before marriage, if it grew significantly due to efforts or contributions of a spouse during the marriage, the increase in value may be considered a marital asset.
Why Accurate Business Valuation in Divorce Matters
A business is not an easily valued asset with a set price tag. Accurate valuation requires an in-depth analysis of business financials, market position, assets, debts, and potential future earnings. An incorrect or manipulated valuation can result in an unfair divorce settlement and have an impact on everything from child support, alimony and property division.
This is especially important when the business is the primary income source for both spouses. An accurate business valuation enables the court to assess how much of the value is subject to distribution and calculate a fair buyout or offset in asset division.
What Is Considered in a Business Valuation?
Our divorce lawyers work with experts such as forensic accountants, valuation professionals, and Certified Valuation Analysts (CVAs) to determine how much a business is worth. In contentious divorces, each spouse may hire their own expert to present competing valuations.
When appraising a business, these experts look at many different factors, including:
- Business income and cash flow statements
- Balance sheets and debt obligations
- Recent tax returns
- Inventory and equipment
- Intellectual property
- Brand value
- Market conditions and competition
- Owner compensation and perks
- Customer base and revenue trends
- Shareholder and partnership stakes
These experts also help our equitable distribution lawyers identify hidden income, inflated expenses, or undervalued assets that may impact business valuations.
Addressing Goodwill in Business Valuation
Another intangible factor that experts consider is goodwill, which includes things such as reputation, brand recognition, and customer loyalty. Enterprise goodwill is linked to the business itself, while personal goodwill is connected to an individual owner.
Determining which part of the business is enterprise goodwill or personal goodwill can be one of the more contentious aspects of business valuation in divorce. In New Jersey, personal goodwill is not considered a marital asset, while enterprise goodwill may be subject to equitable distribution.
These multifaceted issues require the experience and knowledge of seasoned family law attorneys. Our team has decades of experience handling complex divorce cases involving all types of businesses.
Common Business Valuation Methods
There are several methods for business valuation in divorce cases. The approach your property division lawyer recommends will depend on the nature of the business and other factors.
Asset Approach
The asset approach subtracts liabilities from a business’ total assets. It works well for businesses with significant tangible assets, such as trucking or real estate development companies. The asset approach may not be best for service-based businesses or those with substantial enterprise goodwill, as it often leads to them being undervalued.
Income Approach
The income approach considers a business’ ability to generate income over time by projecting future earnings and discounting them to present value. This approach is commonly used for profitable service-oriented businesses, consultancies, and professional practices like law firms.
Market Approach
The market approach compares the business to similar companies that have been recently sold. If there is sufficient data available it can be effective, but it isn’t as reliable for niche companies or those with few comparables.
Our family law attorneys can evaluate the specifics of your case and the availability of financial information and other data to determine which business valuation method will work best for your circumstances.
Identifying Hidden Income or Inflated Expenses
Business owners going through a divorce may try to decrease their company’s value by underreporting income or inflating expenses.
Some common tactics for reducing the value of a business include:
- Delaying payments or contracts until after the divorce
- Inflating business expenses
- Underreporting cash income
- Overpaying family members or friends
Identifying these discrepancies is essential not only for fair business valuation, but also for accurate alimony and child support obligations. Our skilled divorce attorneys work closely with forensic accountants to uncover these practices and ensure a fair valuation.
Types of Buyouts and Settlements
Once a business is valued, it’s up to the court to determine how to equitably divide that value. Options include:
- Buyout – One spouse buys out the other’s ownership and interests in the business. This can be done either through a lump sum or structured payments.
- Offset – The spouse who keeps the business may give up other assets of equal value, such as the marital home.
- Sale – In rare cases, a business may be sold and proceeds divided according to the laws of equitable distribution in New Jersey. This usually happens when neither spouse can afford a buyout or if the business cannot operate without both parties.
- Co-ownership post-divorce – This option is very uncommon and isn’t a great idea due to practical and emotional complications. However, if both parties are willing and a divorce is amicable, it can work.
Your divorce lawyer can advise you on the financial and tax implications of each option and help you decide which one will best safeguard your interests and goals.
Trust Our New Jersey Divorce Attorneys for Accurate Business Valuation
Business valuation in divorce is a high-stakes process. Our divorce attorneys and alimony lawyers have extensive experience in complex property division cases involving businesses, professional practices, and high-value assets.
We understand the nuances of equitable distribution in New Jersey and work closely with trusted valuation experts to ensure your interests are fully protected. We can also help you safeguard your business before or after marriage with a prenuptial, postnuptial, or reconciliation agreement.
Angelo and other members of our team are certified by the Supreme Court of New Jersey as matrimonial law attorneys. Our New Jersey family law firm was selected by their peers for inclusion in The Best Law Firms®; in the fields of Family Law, Family Law Mediation, Mediation, and Arbitration – Plaintiffs.
Whether you’re concerned about protecting your business or want to ensure a transparent valuation of your spouse’s company, our divorce lawyers are seasoned negotiators and experienced litigators who advocate for you every step of the way.
Contact Our Divorce Lawyers to Learn More About Business Valuation in New Jersey
If you’re facing divorce and a business is involved, don’t leave your financial future to chance. The family law team Sarno da Costa D’Aniello Maceri Webb LLC is here for you. Contact us or call 973-274-5200 to schedule a consultation with a divorce attorney in New Jersey. We offer four convenient locations in Roseland, Bridgewater, Hackensack, Morristown, and Eatontown, NJ.
