Business Valuations & Divorce
Fight for Fair Division of Business Assets
Businesses are treated like any other asset in a divorce. Because of this, it is highly important to ensure that your business is properly valuated if you are going through a divorce. Even when a business is considered to be the separate property of one spouse—usually because they owned it before the marriage and continued solely operating it during the marriage—any increase in the business value during the marriage could still be subject to “equitable distribution” in Colorado.
Denver Family Lawyers understands how important your business is to you. Our skilled Denver divorce attorney has over two decades of experience in all areas of family law and, as a noted trial lawyer and mediator, he is capable of protecting the interests of your business.
Call (303) 225-3343 for a Free, No-Obligation Consultation
How Do the Courts Approach Business Valuations?
In Colorado, there are three basic approaches to valuating businesses in divorce cases:
- Asset-Based – The value of the business assets minus its liability. This does not include the value of any goodwill or any discount for minority interests. This is the most appropriate approach when then value of goodwill* or income is relatively small compared to the net value of assets and liabilities.
- Income-Based – The value of income that the business is expected to produce in the future. This approach is best when future earnings and the business’s growth rate is predictable. The value is calculated based on a variety of factors, including:
- Risk-free rate of return
- General market risk
- Risk rate of the industry
- Risk associated with the business being valuated
- The expected growth rate of the business being valuated
- Market-Based – The value of the business based on sales of comparable businesses. This approach brings into play the “theory of substitution,” assuming that nobody would pay more for one business than they would for a similar business. This approach is most appropriate in cases where there are plenty of comparable business sales available for comparison.
*Goodwill is loosely defined in Colorado, being an intangible asset consisting of contributions made to the business that fall short of being a calculable financial interest. There are two types of goodwill: enterprise and professional (or “personal”). Enterprise is associated with the business itself, while professional/personal goodwill is associated with the owner or operator of the business.
Additional Methods of Business Valuation in Colorado
There are two less-common approaches to valuating businesses in Denver divorces:
- Excess Earning – This combines elements of asset and income-based approaches. Essentially, the business value is divided into income by tangible assets and income by goodwill or other intangible assets. Any income above the “fair return” on tangible assets is considered “excess” and is then discounted under the appropriate capitalization rate.
- Buy-Sell Agreements – These agreements are entered into by the existing business owners and provide for valuation of the business shares when fewer than all the owners withdraw or sell their shares in the business. Courts sometimes consider these agreements during the business valuation process.
