How to Handle a Business Valuation in a Virginia Divorce
Dividing assets in a divorce is complicated on its own without the added challenge of evaluating assets with a subjective value, like that of a business. Virginia is an “equitable distribution” state, which means the courts are charged with dividing assets fairly, or equitably, rather than splitting everything 50/50 as is a common scenario with community property states.
For divorce purposes, a business is considered property and is therefore subject to court scrutiny during asset distribution. If the business was started after you were married, it is considered marital property and therefore subject to distribution. If a business was created prior to marriage, but the value increased substantially during the marriage because of the efforts by one or both parties, it can also be deemed marital property.
Evaluating a Business and Its Intrinsic Value
In the past, the Virginia Supreme Court rejected the theory of “fair market value” for a business. The courts have opted to go with a business’s intrinsic value when charged with determining a value for the purpose of marital asset distribution. Intrinsic value is very subjective and is based on the underlying perception of what its true value is, which includes all business aspects such as tangible and intangible factors.
A business expert is typically required to determine intrinsic value. This can be someone like a Certified Public Accountant (CPA) with experience in valuing businesses or a Certified Valuation Analyst (CVA).
Methods Used to Determine Value
Again, determining the value of a business tends to be more art than science. Some traditional valuation models can be utilized to assist with intrinsic value and determine a potential value of the spouse’s financial interest.
One such method is the income or excess earnings approach, which is often used in evaluating a professional practice. If your spouse has business that involves a licensed practice like a doctor, therapist, attorney, etc., this method might be utilized. This starts by looking at the spouse’s income as compared to a group of his or her peers in the same industry. The portion of income that exceeds that of the peer group is deemed excess earnings due to the business ownership.
Another option is the asset valuation approach which uses business assets as the prime factor in determining value. Unless there are a lot of tangible assets like equipment, vehicles, etc., this approach doesn’t provide much value.
To complicate matters even more, the subject of goodwill value comes into play. Essentially, goodwill value is an intangible factor of a company that provides added value. It’s something that brings in clients and customers who rely on a reputation or personal relationships to increase revenues. The law separates personal and professional goodwill for divorce purposes. Professional goodwill is divisible whereas personal goodwill is not.
Retaining a Virginia Divorce Attorney
If you have high net-worth or a complex asset portfolio, it’s important to retain a skilled Virginia divorce attorney who is well-versed in difficult family law matters. Contact Whitbeck Cisneros McElroy PC to schedule a consultation and let one of our experienced attorneys assist with all your family law needs.