Dividing a business during a divorce is one of the most complex financial challenges spouses face. If you or your spouse owns a business, working with a Chandler divorce lawyer or Chandler family law attorney is critical to ensure the business is valued accurately and divided fairly under Arizona law.
Not only is choosing the method that works best to accurately represent your business important, but it’s also crucial to note that a differing method could have a disparate outcome, especially if your spouse’s valuation professional uses a different approach.
Arizona’s divorce law, under Arizona 25-11, states the following:
“All property acquired by either husband or wife during the marriage is the community property of the husband and wife …”
The above includes a business begun by one spouse during the marriage. In addition, even if one spouse began their business before the marriage, making it their separate property rather than part of the marital community, their spouse may have the right to a portion of the business’s improvement in value over the course of the marriage.
The first step in determining a fair division or formulating a strategy that allows the business-owning spouse to retain their business through a buyout or by “trading” it for a marital asset of equal value is an accurate valuation of the business.
This method looks at similar businesses recently sold in the area to gain a clear picture of the business’s current value, should it be sold in today’s market. This method sometimes has disadvantages; for instance, if few similar businesses have been recently sold in the area, it may be challenging to get a clear picture of the business’s market value.
This method reviews the business’s current monthly income and the value of its future earning capacity. The approach focuses on the business’s profitability rather than the market value of physical contents, should it be sold. This method provides an accurate assessment of business value when its income generation is stable and its future growth appears predictable; however, it requires predicting future market trends, which can be uncertain.
This valuation method assesses the current value of the business based on its physical assets, such as the building, furnishings, electronics, and production equipment, as well as any liabilities. This method is complex because a thorough asset value approach also assesses the value of intangible qualities, such as the owner’s “goodwill” or the reliable reputation they’ve built for their business within the community.
Ideally, divorcing spouses can negotiate and attend mediation sessions to reach mutually acceptable agreements on the fair and equitable division of their assets, including a business. Crafting a settlement agreement avoids the expense, time, and contention of a divorce trial. Unfortunately, this can be challenging when spouses and their valuation specialists use different valuation methods, leading to discrepancies in their outcomes.
If the spouses cannot reach a settlement agreement, the case may proceed to court in a contested divorce process, where both sides present their findings to the judge, who then reviews both results and issues a final judgment.
