If you are going through a divorce and own a business, you will likely need a professional business valuation. This is true whether you started the company before your marriage, during your marriage, or if you and your spouse run it together.
A business valuation determines exactly how much a company is worth. This number is vital because it affects how your other assets, such as your home or savings, are divided. If a spouse disagrees on the value, it can lead to long delays and expensive legal fights. Knowing these methods helps you protect your financial interests from the start.
Business Valuation in Arizona
Arizona is a community property state. This law means that any value built up in a business during the marriage generally belongs to both spouses equally. Even if only one person’s name is on the business license, the other spouse may be entitled to a share of its value.
In Arizona, courts often look at Enterprise Goodwill, which is the value of the business name and reputation, versus Personal Goodwill, which is the value tied specifically to the owner’s skills. Our team often works with a forensic accountant to help the court decide how much of the business value is shared and how much is separate.
Defining the Standard of Value
Before an appraisal starts, a professional must choose a standard of value. This is usually one of two things:
- Fair Market Value: This is the price a business would sell for on the open market between a willing buyer and a willing seller. This assumes no one is being forced to sell. In these cases, the value might be lowered if the owner only has a small share of the company.
- Fair Value: This standard is often set by the court. Unlike fair market value, it usually does not allow for discounts. It aims to be fair to the spouse who is being bought out of their share.
Below are five common methods used to reach these values.
1. Asset Valuation
This method looks at everything the company owns. This includes tangible items you can touch and intangible items you cannot.
- Tangible Assets: Cash, equipment, inventory, and real estate.
- Intangible Assets: Patents, trademarks, and customer relationships.
The appraiser adds up the value of these items and subtracts any debts to find the market value or book value. This method is often used for companies that own a lot of equipment, like construction or retail businesses.
2. Historical Earnings Valuation
This method looks at how the business has performed in the past. It checks the company’s gross income, capitalization of cash flow, and its ability to pay off its debts. If a company has a history of high profits and low debt, its value will be higher. If the company struggles to pay its bills, the value will naturally drop. This is a common way to value established businesses with steady records.
3. Relative Valuations
Sometimes, an appraiser looks at comparable businesses to see what they would bring in if they were sold. They find similar companies that were recently sold and use those prices to estimate what your business is worth. For this to work, the businesses must be very similar in size, activity, and equipment. If the businesses are too different, it is difficult to come up with a reasonable price.
4. Discounted Cash Flow Valuation
If a company’s profits are expected to change a lot in the future, this method is often best. It looks at the cash the business is expected to make in the coming years and converts that into today’s dollars. This helps the court see the true current value based on future potential, making it easier to ensure things are split properly.
5. Future Maintainable Earnings Valuation
This method is used when profits are expected to stay stable. The appraiser reviews sales, expenses, and gross profits from the last three years. By looking at these patterns, they can estimate what the business is likely to earn in the future. This provides a solid value for the divorce settlement today.
What Cannot Be Valued?
While the methods above give a business a financial value, they cannot measure everything. A valuation does not account for the blood, sweat, and tears or the sleepless nights spent building a company from the ground up. It also does not measure the emotional value you place on your work.
Because emotional value is not part of the legal math, it can feel like an uphill battle to keep control of your company. If you are the spouse who helped support the owner, it can also be hard to prove exactly how much your support was worth. This is even more difficult if a spouse tries to hide money. If you suspect this is happening, you may need to look into finding hidden assets to ensure fairness.
Why You Need a Legal Strategy
A business valuation can lead to big changes. You may be able to keep your business, but you might have to give your ex-spouse more of the other community property assets to balance things out. Because Arizona law is specific about how businesses are handled, you should not try to do this alone. Working with an attorney ensures the right valuation method is used so you receive a fair outcome.
If you are concerned about your business or your rights to a shared company, contact Modern Law today. Our team can help you navigate the valuation process and protect your future.
