What do you want to do if you have a business and you’re getting divorced? It’s probably one of the greatest concerns people have in a divorce if there is a business. So there’s several things you want to know going into it.
First, there are a couple unique areas about the law in New Jersey divorce when it comes to business evaluation and division. There are one or two things that are very problematic to business owners in New Jersey divorce law, and that is that it does not recognize what’s called a minority interest or lack of marketability. What that means is it doesn’t adjust for the fact that you may have a business that really nobody will buy. If you were an independent contractor and you work out of your house as a 1099 for a company doing computer programming, or if you’re a plumber that has a truck and a toolbox, nobody’s really going to buy that business. Most other areas of law you would have a lack of marketability discount, or minority shareholder if you were 40 percent owner and your brother was a 60 percent owner. Nobody’s going to buy your 40 percent because you can’t have any controlling interest.
These are examples where other areas of law would adjust the value of your business for these problems when it comes to the actual value at reselling. Divorce law does not. So the first thing you need to do is recognize this and learn this because your values are going to be inflated, unfortunately, because of it and you need to know how to handle divorce from Destroying Your Business.
Understanding New Jersey Divorce
Another important aspect of New Jersey divorce law is the concept of momentum. This generally applies more to people with a pre-marital business interest that has taken on a new value post-marriage. Momentum is the concept that, after a certain amount of time, a business will take off. Not necessarily because of the efforts of the joint spouses, but because of the prior efforts that may have existed in certain cases before the marriage.
So, let’s say you have a business that you had for 20 years and it has a certain increase in value, and then you get married year one, and you’re married for three years and the business quadruples in size. It’s unlikely that the increase in the business was the three years of your marriage. It’s most likely the momentum that came from the 20 years prior to your marriage. Fortunately, divorce in New Jersey recognizes this concept, but you have to understand that you also need to have some kind of valuation from the pre-marital portion to show that.
Next, you need to understand the main ways that a business will be valuated because there’s different valuations for different kinds of businesses. You need to understand them in case the one that’s being performed on your business isn’t a good fit. Now, in some cases they may actually even do more than one, but usually it’s going to be one.
So there are three main types of business valuations. There’s an asset-based evaluation, an earning valuation, and a market valuation.
The asset-based evaluation is just adding up the assets and debts. Take the value of the assets minus the debts, that’s your value. It’s a very simple approach. It’s not very useful in small businesses, especially in solo practitioners or sole proprietorships because there’s often a blur between the assets owned by the company and the assets owned by the individual. So you probably want to refrain from this evaluation if you are a small business or a sole proprietor.
The earnings value approach is probably the most common approach. That will take your past earnings as a prediction of your future earnings and a certain multiple thereof. It is the most common. It can be problematic in that it’s speculative in some ways and you have to determine if the multiple they’re using is applicable and appropriate in your case or not. This may be a very intricate question that you may not be well-versed to answer. So you do want to find out who you need to speak with to find that out, especially because it is the most common approach to business evaluations.
The last one is market value approach, which basically looks at similar businesses sold in your field, your area, or both, and it tries to give a comparative analysis to your business. In many ways it’s probably my favorite approach to it, but that too is problematic because you’re not always comparing apples to apples. Every business, especially small businesses, will have very unique components that change the dynamics of it, whether it’s who owns it, the town you’re in, or your family connections. A lot of issues can affect the market value approach to, especially, a small business.
After that, you also still want to look to what’s going to happen in the future. That’s generally not going to be considered very highly in most evaluations because it’s speculative. Nobody really knows what’s going to happen in the future when it comes to business and economy, things like that, but you can look to developing trends. Artificial intelligence is a very large developing trend. Online purchasing and marketing is huge. Technology is taking over a lot of industries and eradicating them. So you need to look at whether these areas or any other areas are likely to infiltrate your business and greatly affect its valuation in the near future.
Now, these are just some helpful tips. When you’re evaluating a business, you’re most likely going to need an expert like an accountant. I’m not an accountant. I’m not giving tax advice. I’m just trying to give you some general background information so you can understand how your business is going to be evaluated and the important issues that you need to start with. If you are going to have a business evaluated, I’d recommend you look into these issues before you file your divorce, if you can, especially if you have a pre-marital interest. You may not have considered your need to value that portion of the business, and it may be hard to gather that information if you’ve been married some time or the business has been open some time. As I said earlier, it’s going to be a very important component to your valuation.