There’s a general framework for evaluating the value of a business, but the end result varies around each specific situation. To help you gain further insight into the matter, let’s discuss factors determining business valuation during a divorce in Minnesota.
Reasons for a Business Valuation
If the parties do not agree upon the value of a business or the value of a business is unknown, a business or an interest in a business may be valued by a financial expert. The parties may agree to retain a neutral financial expert to value the business or the parties may wish to retain their own financial expert to value the business. In some cases, the parties may initially retain a neutral financial expert, but one or both parties may then retain their own financial expert to value the business as well as critique the neutral expert’s report.
Valuing a business is critically important to provide for the division of the asset as well as to determine what income is generated from the business entity for spousal maintenance and/or child support purposes. In many cases, after a financial expert values a business, the parties are able to reach a resolution of the divorce proceeding without proceeding to trial.
Business as a Marital/Nonmarital Asset
Among the general factors considered when a divorce is contested, is whether the business is a marital asset, a non-marital asset, or a mixture of both. A non-marital asset is: one obtained before the marriage, excluded in a prenuptial agreement, or acquired after the valuation date. The party making the claim that a business is nonmarital has the burden of proving nonmarital nature of the business. Marital assets are assets acquired from the date of marriage to the valuation date.
In most cases, a spouse or both parties will expend marital effort that improves the value of the business. As a result, the business would have both marital and nonmarital components. Courts have applied the Schmitz formula, the same formula to divide the marital/nonmarital interests in real estate, in order to determine the marital and nonmarital components of the business.
Dividing a Business
In many cases, a Court is likely to award a business to one spouse or the other. If one spouse is awarded the business, the other spouse may receive a similar amount of assets such as real estate, retirement accounts, etc. Even after a business valuation, the parties may still not agree upon a value for the business. However, the parties may still agree to sell the business and split the sale proceeds.
Determining the Fair Market Value
Minnesota courts are charged with determining the fair market value of businesses or business interests. Fair market value is how much would someone buy the business for on the market, under fair circumstances. These fair circumstances include: neither party being pressured or under any compulsion to buy or sell, and having transparent knowledge and facts about the business.
Fair market value is an estimate of the market value of a property, and is different from the intrinsic value, which an individual may place on the business based on their preference or circumstances. This factor is a standard method courts examine to value a business in real-time, based upon the open market.
Common aspects of the business will be examined, such as: annual projected income, debt, type of business, longevity, stability in markets, customer base, and inventory/assets held. Yet, simply looking at these factors doesn’t determine a real value in totality, therefore other factor such as discounts will be taken into consideration.
Discounts Affecting the Fair Market Value of a Business
There are two main discounts that may affect the value of a business:
- Key Man Discount; and
- Minority Discount.
Key Man Discount:
This is a term basically describing how important and vital a person is to the business in question, concerning measurable profitability. In the case of a divorce, how key was each partner in the profitability of the business? If one person worked the business independently of the other, this means that person had a key role in the business, and therefore is considered more vital to the success of the business. The key man discount takes into consideration the value the spouse (or “key man”) brings to the business. In other words, how would the business function without the key person?
Being a key person in the business, doesn’t determine automatically how it will be valued, yet it does influence the valuation of the business on a whole. Without the key person involved in the business; its value may be significantly less which should be taken into consideration during the business valuation process.
This term describes the percentage of a business owned or invested into, by the parties involved. In order to determine a real value for a business, the court factors in if the couple or persons are minority or majority shareholders in the business. The reason for providing a minority shareholder discount as the minority shareholder will have less voting rights and less control over the business strategy and progression of the company.
Majority shareholders have more power and influence over a company than minority shareholders. This means the value of the business they are invested into is higher and worth more, and so this is another factor the court examines. If the business is wholly owned by the couple or one of the spouses, then this factor is not considered in the valuation.
Summary of Business Valuation in Minnesota
Going through a divorce is a difficult period for both parties involved, and dividing assets is generally a strong point of contention. During the process of a divorce, many variables are evaluated to determine the value of a business in question. Some variables are more fact-based and easy to understand, while others have to be taken into careful consideration by experts with experience in these matters.
Having an experienced St. Paul family attorney fighting for a fair business valuation in your divorce will ensure the best outcome is achieved in the divorce settlement or trial. Gilbert Alden PLLC is a law firm with valuable expertise in Minnesota divorce law, and has the experience to make sure you get the outcome you deserve.
If you’re going through a divorce in Minnesota and need a proven divorce attorney by your side, please contact us today.