The value of a business is a common issue in divorces. It can also be one of the most contentious issues. If you are divorcing or planning a divorce, the virus could substantially reduce or even eliminate its value. There are lots of reasons why, including an inability to predict your future earnings, the risk of staying in business, and the impact of tax law changes.
Business value in a divorce depends in large part on being able to predict with reasonable certainty how much you will earn in the future. Valuation experts are not ‘licensed psychics’. So they have to make some assumptions about your future earnings. One of the key factors in making this prediction is your past earnings. However, past earnings may now be meaningless, leaving the expert to have to make some wild guesses.
The value of a business is driven by the amount of predicted future risk. The higher the risk, the lower the value. Obviously, we have a high risk environment right now for lots of businesses. That could reduce its value.
Valuation experts in a divorce make assumptions about the tax rate the business owner will pay. The lower the tax rate, the higher the value of the business. The new laws providing relief to businesses and individuals may reduce your tax rate and, therefore, affect its value.
With massive layoffs and many folks unable to afford a new mortgage or pay their existing one, the value of real estate could be affected. If your business depends on the construction or real estate industry or includes investments in these industries, its value could be affected.
It certainly makes it more difficult. But there are options. You could just compromise on the value based on guess work. You could also let the valuation issue be decided after your divorce in order to let the markets settle down a bit. If you go this route, there should be an agreement as to how much the business owner will be paid for their service and how any net profits would be divided. These options require careful consideration and should not be attempted as DIY.
If you are already divorced and stuck with paying for a business that no longer has value, your options are far more limited. If you are in this position, don’t just give up. There may be a solution under certain limited circumstances. Consider a consultation with legal counsel to determine if there is any recourse.
Message from McCarthy Family Law
McCarthy Family Law is a full service family law firm that serves many small business owners going through a divorce. If you are going through a divorce or have questions about filing for divorce, we are here to assist you. At this time we are offering no charge initial phone consultations for those on the front lines, including medical professionals, first responders, law enforcement, and military personnel. Please call us at 520-623-0341 to explore your options.