The process of going through a divorce is often complicated and can be even more so when a business is involved. In Colorado, a spouse’s business interests are deemed marital property and may be subject to equitable division. However, the process of valuing and allocating a professional business in a divorce will vary depending on whether the business was jointly owned or owned by one spouse before the marriage. If you are a business owner with questions about how business holdings are assessed and apportioned during divorce proceedings, consider contacting the experienced divorce lawyers of the Colorado Divorce Law Group at (720) 593-6442.
Businesses are considered assets during divorce proceedings, but they may not always be considered marital property. If one of the spouses started the business before the marriage and the spouses are not co-owners of the company, Colorado divorce courts may consider the business as a separate asset rather than marital property. On the other hand, if the business increased significantly in value during the marriage, that increase could be deemed marital property and might, therefore, be subject to equitable distribution under Title 14 of the Colorado Revised Statutes.
Colorado’s Boulder County identifies three standard methods for assigning values to businesses and other properties:
Colorado divorce courts typically use one of these three methods for assigning values to businesses. The type of methodology the court chooses to use depends on the nature of the business. Accordingly, a business with substantial assets may be subject to asset-based valuation, while a business that has limited assets and operates primarily to generate income may be evaluated using the income-based valuation.
An asset-based business valuation calculates the value of the business by first determining the fair market value of its assets and then subtracting the company’s liabilities. The assets of a business include anything with either a tangible or intangible value, including cash, real estate, inventory, equipment, stocks, intellectual property, and anything else with a financial value.
Asset-based valuation is commonly used for businesses that hold most of their value in assets. Common examples of businesses subject to asset-based valuation include car dealerships and real estate holding companies.
The income-based valuation method is a common approach to valuing businesses, as many different types of businesses derive their value from the revenue they bring in. Income-based valuation assigns a value to the business based on that business’s ability to turn a profit now and in the future. When using this approach, valuation experts examine the financial history of the company to arrive at an estimate for future earnings. This projected future income estimate is then used to calculate the current value of the business.
The two main sub-categories that are used within the income-based approach are as follows:
The market-based valuation method, or market approach, uses public data for comparable business transactions to arrive at a value for the business in question based on relative factors. In market-based valuation, the company’s value is determined by considering the market prices of comparable businesses either recently sold or currently on the market. Valuation experts use financial indicators like sales, price-to-earnings, and book values to assign a value based on market forces that have influenced the value of similar businesses.
While Boulder County only prescribes three forms of property valuation, in some cases, the entity making the valuation may employ a combination of valuation methods depending on how the business operates. For instance, a real estate holding company that generates income through its real estate assets may be valued through a combination of the asset and income approaches. The experienced divorce lawyers of the Colorado Divorce Law Group can help clarify the factors that govern valuing and allocating a professional business in a divorce.
Colorado divorce courts will consider numerous factors when determining if and how to divide a business in a divorce. Some of the main factors that can influence the division of a business in Colorado include:
If you have questions related to valuing and allocating a professional business in a divorce, you may want to talk with an attorney who can advise you on how to protect your business and other assets. As a business owner who is facing the possibility of divorce, consider contacting an experienced attorney at the Colorado Divorce Law Group by calling (720) 593-6442 to schedule a consultation today.