During a divorce, assets must be divided equitably between the two spouses, and marital businesses are no exception. To be divided fairly, a business’s value must be assessed and an investigation must take place to determine how much of the business qualifies as community property. A business can be evaluated in different ways, but the most common methods for conducting business valuations are the book value method and the market/earnings method.
Tangible assets, such as property and equipment, and intangible assets, such as goodwill and patents, are important factors in a business valuation. In Nevada, assets obtained after marriage must be divided as community property unless otherwise noted in prenuptial agreements. The exception lies in assets gifted, willed, or acquired from court settlements.
Assessing Business Assets
The value of a business can be determined by analyzing a variety of assets, both tangible and intangible. Some of these assets include:
- Equipment owned
- Real estate
- Patents
- Trademarks
- Goodwill
- Inventory
- Intellectual property
In addition to assets, factors such as financial earnings, industry trends, competitor landscape, and profitability are considered during the valuation process. A business can be evaluated using multiple techniques focusing on income, assets, or market value. Two of the most common methods are the book value method and the market/earnings method. The book value is found by subtracting liabilities from the value of assets. The market/earnings method considers the earning potential of the business. A business may have a slightly different value depending on the method used, but all of the outcomes should be within the same range of value.
Profitability and Goodwill
Profitability at its core is simply the financial difference between expenses and revenue. This can be influenced by personal expenses that are not considered deductible by the IRS. When assessing a business, these expenses are often removed from the expenses category, creating a larger profit margin.
Goodwill is a highly influential intangible factor in assessing the value of a business. Goodwill considers the value of customer loyalty, business and owner reputation, the number of clients, location, longevity, and revenue. Goodwill can increase the value of a business because it shows that the business can continue operations and consistently generate revenue. Goodwill can be represented as the remaining value when subtracting the net book value from the appraised value of the business.
Once a consensus is reached regarding the value of the business, assets can be equitably distributed between the two parties.