How Are Business Interests Valued in an Equitable Distribution Analysis?

Owning all or part of a business can be very rewarding personally and financially. However, when your marriage ends, assets accumulated since you were wed typically become part of the divisible marital estate. This can include the value of your ownership share, even if your spouse never participated in the business.

Under North Carolina’s equitable distribution law, when divorcing parties cannot settle on a property division agreement, the judge decides how assets should be allocated based on what he or she thinks is fair. To issue an appropriate order, the judge must first determine the value of particular items within the marital estate. Obviously, this is easy for something such as a bank account, but pinpointing the value of a business can be one of the most complex and contentious aspects of a divorce.

There are many approaches to valuation, each with certain benefits and drawbacks. One of the simplest methods is to examine the balance sheet of the business and calculate its book value. This approach involves subtracting the business’s liabilities from its assets to determine its net worth. While straightforward, this method may not capture the true value of the business, especially if it has significant intangible assets or growth potential.

Of course, there are situations where a company might not be making money at the time, but work that was done during the marriage has the business poised for a significant profit surge. In these situations, forecasting techniques could be utilized that take cash flows and enterprise value into consideration. A potential disadvantage is that speculative figures are often highly disputed.

The existence and value of business goodwill can also be a source of conflict. In Logue v. Logue, the Court of Appeals for North Carolina reviewed a decision where a divorcing wife’s dental practice was valued at roughly the price she had purchased it for two years earlier. Dr. Logue alleged that this overstated the worth of the practice as most of its value derived from the goodwill associated with the dentist who previously owned it. She also claimed that business goodwill could not be calculated reliably without expert testimony. However, the court rejected her arguments, reasoning that a significant loss of goodwill did not occur because the previous owner still worked at the practice. Accordingly, the sale price was a reasonably accurate reflection of the asset’s worth, and expert testimony was not necessary to show this.

Identifying the right approach to valuation often depends on the nature of the business and the availability of financial information. It’s also important to consider factors such as market conditions, industry trends and the specific circumstances of the divorce.

Given the complexities of business valuation, it’s crucial to work with experienced legal and financial professionals who can generate a fair and accurate assessment. At The Moore Law Office, PLLC, we have the experience and network of experts to guide you through the equitable distribution process toward a favorable resolution. Contact us by calling 828-258-8053 or use our online form to set an initial consultation. Our office is in Asheville.