Executive Summary
In divorce, “business ownership” can be one of the most disputed assets because the value depends on far more than reported profits. Courts and counsel typically need to know: (1) what the business is worth, (2) what portion is marital versus separate, and (3) what evidence supports (or undermines) the valuation. A defensible valuation often requires careful separation of personal expenses, normalization of owner compensation, and a clear linkage between records and assumptions.
1) What “Ownership” Means in Divorce
Ownership can be measured by equity interests (shares or membership units), partnership percentages, profit interests, voting rights, and contractual claims. In closely-held entities, operating agreements and shareholder agreements can materially affect value, control, and transferability.
2) Marital vs. Non-Marital Components
Even if a spouse owned the business before marriage, the marital estate may include appreciation attributable to marital efforts, reinvested earnings, or commingled funds. The analysis often focuses on contributions during marriage and whether growth was passive or driven by active management.
3) Common Valuation Approaches Used in Disputes
- Income approach: Values the business based on expected future cash flow (often via capitalization or discounted cash flow).
- Market approach: Uses comparable transactions or guideline public companies, adjusted to fit the subject business.
- Asset approach: Values net assets, often used for holding companies or asset-heavy businesses.
4) Normalization Issues That Often Drive the Fight
- Owner perks/personal expenses: Vehicles, travel, meals, family payroll, and other discretionary items.
- Non-recurring items: One-time expenses or unusual revenue spikes.
- Owner compensation: Adjusting pay to market levels to reflect true operating performance.
5) Control, Marketability, and Why Discounts Matter
Minority interests may lack control, and privately-held interests can be harder to sell. These realities are often reflected through discounts (e.g., lack of control and lack of marketability), but whether and how they apply depends on legal standards, facts, and the purpose of valuation in the divorce context.
6) The Evidence That Typically Carries Weight
- Tax returns and financial statements (multiple years)
- General ledger detail and bank/credit card activity
- Owner distributions, loans, and related-party transactions
- Contracts, customer concentration data, and operational KPIs
- Industry data supporting assumptions and risk adjustments
7) Practical Tips for Attorneys
- Lock down the valuation date(s) and the legal standard early.
- Request records that support normalization (not just summary statements).
- Identify what drives earnings: owner labor vs. transferable enterprise value.
- Prepare for rebuttal: assumptions, comparables, and discount rationale will be challenged.
Conclusion
A strong business valuation in divorce is not just a number—it’s a documented explanation of what is being valued, why it is marital or separate, and how the value was derived from reliable evidence. When done correctly, it reduces uncertainty, narrows the dispute, and supports settlement or testimony with clarity.
