A common set of facts in a divorce mediation on Long Island is that one of the parties — typically the husband, has what both he and his wife call a small business. It might be a landscaping business, or a remodeling business, or a construction business. What all of those have in common is that the husband is the only employee. He may hire some occasional part time workers, but he is really the business.
The wife, not unreasonably, sees the years that she has spent keeping the books, giving advice, and observing his competence at running a business, or perceived lack of it, as entitling her to some fair share of the value of the business.
Certainly, a business established during the marriage, that has used family resources to exist and that has supported the family, is a marital asset, and it therefore subject to the equitable distribution of marital assets between the parties.
That is usually not the issue.
When the wife brings up the business, and that she feels entitled to some share of the value or future earnings, the husband often responds, “It’s not a business; it’s a job. It’s worth what I make if I work. If I don’t work, it’s not worth a dime.” And the stage is set for a serious dispute.
Who is right?
There are many ways to value a business. The most accurate is to sell it. What a third party will voluntarily pay for a business is what it is worth. However, that is rarely a realistic option. Instead we have to use an approach to evaluting the business without either selling it or its parts for cash.
For a publicly traded company, listed on a stock exchange, it is simple. The total value of its publicly traded securities is an excellent benchmark for value. While that is not how we would value a whole company — there are a lot of other factors that don’t concern us here — certainly it is a simple way to value an interest that the marriage owns in a publically traded company. But that is not what we are talking about here.
For a business that is not publically traded there are a number of approaches to valuation. Again, the basic principle is, what would a third party pay for it? One approach is the “going concern” value. What assets and liabilities does the business have and what is it’s distributable income? Again, this is not a treatise on business valuation, but an attempt to clarify an issue that occurs again and again in divorce mediation on Long Island, where what the parties refer to as a small business is a major issue in the divorce.
If the business in question has been in existence for a number of years, has audited accounts and a history of established business, it is possible to hire a business appraisor and have a formal appraisal done. I will discuss that, and the alternatives, in my next post.
