Determining how to handle a business asset is one of the most complicated issues in many divorce cases. Under Virginia divorce law, circuit courts are given the responsibility of fairly dividing the value of any marital property of the parties. Marital property includes any property acquired by either party during the marriage, regardless of how it is titled. Sometimes the parties own and work in a business together, in which case the value of the business is less important than how the business will evolve into the new situation where the owners are no longer married. More often than not, however, one spouse has an ownership interest in a business while the other does not, in which case the value of the ownership interest becomes increasingly important.
So How Do Virginia Courts Value a Business in Divorce?
The Supreme Court of Virginia has rejected a “fair market value” or “willing buyer/willing seller” standard of value for divorce. Instead, courts will look to the concept of “intrinsic value” when determining the worth of a business. Intrinsic value is a very subjective idea that looks to the worth of the property to the parties going through the divorce. It cannot be limited by objective criteria commonly used in open market transactions. In fact, the business may have no established market value, and the owners may have no interest in selling. Usually, one party will continue to enjoy the profits of the business while the other must relinquish all future benefits. Still, the intrinsic value of the business must be converted into a dollar amount.
Traditional valuation models can be used to assist in determining intrinsic value, and three methods are commonly relied upon by experts to determine the value of a spouse’s interest in a business: (1) the income or excess earnings approach, (2) the asset valuation approach, and (3) the market value approach.
The income or excess earnings approach, often used when valuing a professional practice, starts with a comparison of the spouse’s income to the average income of a peer group. That portion of the professional’s income that is greater than the peer group is considered excess earnings due to the ownership of the business. Those excess earnings are then projected over the remainder of the owner’s career, using a discount factor to calculate the present value of the total future earnings.
The asset valuation approach uses a valuation of the assets owned by the business to determine a value.
The market value approach attempts to determine the value of a business based on the selling price of similar businesses.
To complicate matters even further, many businesses rely on on goodwill in attracting customers. Goodwill that is attributable to an individual spouse is considered personal goodwill and is that spouse’s separate property, not to be divided in a Virginia divorce. However, goodwill that is attributable to the practice or business is commercial goodwill and can be marital property, subject to equitable distribution.
Due to the imprecise nature of determining value using any of the methods described above, and of determining personal versus commercial goodwill, business assessments can vary wildly depending on who is conducting the valuation. Regardless of the method used, the value must also take into account the parties themselves and their situation. Consequently, early investigation into a business asset in divorce is crucial. Intelligent preparation in this regard can mean a difference of tens of thousands of dollars, if not more, to your case.
If you are facing a divorce in Virginia and you or your spouse have an ownership interest in a business, consult with an experienced divorce attorney as soon as possible. The divorce attorneys at Livesay & Myers, P.C. have years of experience with equitable distribution cases involving business valuations in Northern Virginia. Contact us to schedule a consultation today.