The Valuation of a Business or Professional Practice in a Divorce

The Valuation of a Business or Professional Practice in a Divorce

The valuation of a business or professional practice in a divorce in Jefferson County or Louisville is not simply the fair market value of the business, or the price a “willing” seller would pay a “willing” buyer.  It is a complex calculation involving several factors including the fixed and real assets of the business, as well as income and Goodwill.

Many operating agreements, corporate documents, professional practice agreements and business operating agreements attempt to establish a false value for the ownership interest in the entity. These values are usually set quite low in an attempt to negatively impact the valuation of the community property interest in the business or professional practice. The courts have repeatedly dismissed the validity of these arbitrary figures as a true valuation of the asset.

Business and Professional Practice valuations are prepared by external experts who work with Dodd & Dodd on a case-by-case basis. This can include but is not limited to:

  • Professional Business Appraisers and Brokers
  • Certified Public Accounts (CPAs)
  • Financial Analysts and Economists

There are too many factors which go into the valuation of a business or professional practice to cover in the context of this blog. The valuation for the purposes of marital property division within the context of the divorce will be primarily be based upon the income or revenue generated by the business or professional practice, the impact of the Goodwill of the spouse with the ownership interest, and questions of separate property versus marital assets or those where the interests are commingled.

You cannot compare a privately held business to a publicly traded entity. Two separate cases have determined valuation cannot solely be based upon a ratio of earnings valuation which is applied to publicly held companies. They must be independently appraised.

Another popular method of valuation is “discounted future earnings.” This method equates the value of a company to the present discounted value of the future earnings of the company. The valuation expert may develop a model of what the company will earn over successive coming years, discounting the resulting cash flow stream after adding the residual value of the company may constitute the valuation of that asset. This method cannot be utilized for professional practices.

The valuation of a business or professional practice must also balance the value of all assets of the business including inventory, fixed assets and real property and consider other aspects such as accounts receivable, pre-paid expenses, cash on hand and all contingent liabilities.

The valuation of a business or professional practice is quite legally and financially complex.  This is why it is so important to work with the experienced, skilled and proven divorce attorneys at Dodd & Dodd. We protect our client’s interests in all cases involving a business or professional practice.

We invite you to review the recommendations of our clients and contact us or call 502-584-1108 to schedule an appointment with one of our business, tax, divorce and family law attorneys.