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Business owners work hard to accrue value for their companies. When they get divorced, any value accrued during the marriage must be split according to Oklahoma’s equitable division laws. The question is, how are businesses valued in an Oklahoma divorce?
Complexities Associated With Business Valuation During Divorces
Business owners often assume that if they started their companies before they were married, any growth that occurred during the marriage is still separate property and is not to be divided. Non-owning spouses, on the other hand, typically assume that these companies are marital assets that should be divided equitably. In fact, the outcome of a business division in divorce litigation is unpredictable.
The trial court determines the business’s value, but doing so is a difficult task. The process is conducted on a case-by-case basis using fact-specific inquiry. The key factors that the court considers when valuing a business as a marital asset include:
- Property classification
- Valuation dates
- Goodwill value
No single formula exists for valuing a business, and added complexities can make this analysis even more challenging. Your Oklahoma divorce attorney can help you find a business valuation professional or forensic accountant to conduct an independent valuation, which can help you make sure the court’s assessment of your company’s value and how much of it is considered marital property is accurate.
Determining Marital vs. Separate Property
There were approximately 371,640 small businesses in Oklahoma as of 2023, and the divorce rate in the state is 5.88%. What that means is that there are plenty of business owners facing the division of their companies as their marriages dissolve. One of the biggest concerns for those business owners is determining what portion of their companies is considered marital vs. separate property.
Oklahoma law assumes both spouses are entitled to the property acquired during a marriage, making it community property. Any property that was acquired before the marriage will likely be assigned to the spouse who acquired it. That means the court must consider the date that the business was created, how it was financed, and its overall operations both before and during the marriage to determine what portion of the company is marital vs. separate property.
Businesses typically increase in value over time. If either spouse’s efforts contributed to the increase in value, it is typically calculated into the marital estate. If the increase in value occurred due to market forces, it remains separate property. However, there are exceptions to this rule. In determining whether the value accrued by a business is separate or marital property, courts often consider:
- If the increase occurred during the marriage
- If the increase was active or passive
- Proof of the increase
- Whether marital efforts caused the increase in profits
The Importance of Valuation Dates
A business’s valuation date is left to the trial court’s discretion, which will typically choose a date between the date of the trial or decree of dissolution and the date of separation. If the business experienced a substantial change in profits post the date of separation, that could weigh on the court’s decision. Financial misconduct or forming a competing business can also impact valuation dates.
Understanding Goodwill Value
The non-monetary value of a company is also considered when determining an equitable division. It’s often known as the goodwill value, which refers to the worth of intangible assets like future growth potential and customer loyalty. However, not all goodwill value is considered during a business valuation. Only enterprise goodwill is subject to equitable division.
Enterprise goodwill exists independently of either spouse. It includes the company’s reputation, customer base, and operational system. Enterprise goodwill is a marketable asset, whereas personal goodwill is not.
Methods of Business Valuation
There is no one method for valuing a business. Instead, forensic accountants use some combination of these methods:
- Market capitalization
- Times revenue
- Earnings multiplier
- Discounted cash flow
- Book value
- Liquidation value
You can benefit from working with an independent financial professional to get a clear picture of what your business is worth.
FAQs
How Do You Determine the Value of a Business in a Divorce?
You determine the value of a business in a divorce by hiring a certified forensic accountant or appraiser to calculate the company’s fair market value using one of three approaches: income, market, or asset-based valuation. The process may involve auditing records to find hidden income, assessing both tangible and intangible assets, and distinguishing between community property accrued during the marriage and separate property owned before the marriage.
How Much Is a Business Worth With $500,000 in Sales?
You can determine how much a business with $500,000 in sales is worth based on average revenue multiples of 0.3x to 0.8x, which means it will be worth from $150,000 to $400,000. A more accurate valuation can be obtained by determining the company’s profit margins, with small businesses typically selling for two to four times their seller’s discretionary earnings.
What Assets Are Untouchable in a Divorce?
Assets that are untouchable in a divorce are separate assets, which include any portion of a business that you owned prior to your marriage. Any value that was accrued following the date of your separation is also considered a separate asset. Additional separate assets include inheritances and gifts made to individual spouses.
What Is the Biggest Mistake in a Divorce?
The biggest mistakes in a divorce include allowing your emotions to drive your financial decisions, not securing legal counsel, and neglecting the long-term tax implications of settlements. Rushing the process, hiding assets, and failing to create enforceable agreements are also common mistakes in divorces, including those that occur between business owners.
Hire a Divorce Lawyer Today
If you’re a business owner in Oklahoma preparing to get divorced, you can’t afford to leave the division of your company up to chance. You need to hire a divorce lawyer who has experience working with business owners and other high-net-worth individuals.
You can trust the team here at Bundy with your divorce case. We have helped countless business owners, from practicing physicians to successful entrepreneurs, protect their financial interests while dissolving their marriages. We can help you, too. Contact us to schedule an initial consultation today.
