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Valuing and Allocating a Professional Business In a Divorce

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.

Is a Business Considered an Asset in a Divorce?

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.

How Is the Value of a Business Determined for Divorce?

Colorado’s Boulder County identifies three standard methods for assigning values to businesses and other properties:

  • Asset-based valuations
  • Income-based valuations
  • Market-based valuations

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.

Asset-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.

Income-Based Valuation

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:

  • Capitalization of earnings—The value of the organization is determined by calculating the value of projected future profits based on present earnings and expected future earnings. The current cash flow, the annual rate of return, and the expected value of the company are all considered when using the capitalization of earnings approach
  • Discounted cash flow—This valuation method is used to estimate the value of the business based on anticipated future cash flows. The valuation expert will assign a value to the present-day business based on projections of how much money that business can be expected to produce in the future

Market-Based Valuation

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.

Combination Valuation

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.

How Do You Split a 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:

  • Start date—The court will consider the date the business started, particularly whether the business was in operation before the marriage or if it began during the marriage
  • Value—The current value of the business and assets held by the business are both important factors when deciding how to divide a business in a divorce. Courts also consider whether the company has increased in value during the marriage
  • Liabilities—If the business is considered marital property, the court may distribute business liabilities to each spouse as part of the divorce
  • Involvement from each spouse—Courts consider both financial and time investments. If both spouses dedicated time and/or money to building and growing the business, the court will consider these contributions when splitting the business during the divorce.

Contact a Colorado Divorce Attorney for Help Today

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.