Indiana follows a “one-pot” theory when determining what property is to be considered part of the marital estate. This “one-pot” theory makes it so that all property, whether acquired before or during the marriage, is part of the marital estate.1 As such, if you or your spouse are a business owner, the business will be considered a part of the marital estate. In this blog, we look at 5 key issues with business valuations in divorce.
Date of Valuation. The first key issue to know with business valuations in divorce is the date the trial court uses for its valuation. In Indiana, trial courts have broad discretion when it comes to valuing property in dissolution matters. In general, the marital pot “closes,” so to speak, when one party files for divorce. This means that property acquired by an individual after the petition for divorce is filed is not considered a part of the marital estate. Once a court fully identifies all marital assets, the court then has the discretion to set any date between the date of filing the divorce petition and the date of the hearing for valuation.2 As you can imagine, the date the trial court chooses to value a piece of property can have a huge effect on how the property is finally divided. As our Court of Appeals has explained, “[t]he selection of the valuation date for any particular asset has the effect of allocating the risk of change in the value of that asset between the date of the valuation and date of the hearing.”3
Evidence to Support Valuation. Just as the trial court has broad discretion in choosing the date of valuation, so too does the trial court have broad discretion when it comes to placing a value on a business. However, one key in valuing a business is that you must support said value with some sort of evidence. The most common and accepted way of doing this is to get a business appraisal. When it comes to valuing a business, the trial court must choose a valuation within a range (if there is a range) of values supported by evidence.4 For example, say you get a business appraisal and your business is worth $500,000 and your spouse obtains a business appraisal that states the business is worth $1,000,000. The trial court would be required to choose a value somewhere between $500,000 – $1,000,000.
Different Approaches Used in Business Valuation. When it comes to valuing businesses, there are typically three (3) different approaches used. The first approach is the asset-based approach. Under this approach, a business is valued by using the fair market value of the assets of a business minus any related liabilities. The second approach is the market approach. Under this approach, a business is valued based on the selling price of comparable businesses. The third approach is the income approach. Under this approach, a business is valued based on its ability to generate future income for the owners of the business.
Goodwill. Next, there are a lot of variables that a trial court can rely on in valuing a business. One such variable is what is known as “goodwill.” Goodwill is described as the value of a business or practice that exceeds the combined value of the net assets used in the business.5 Goodwill can be classified as “enterprise goodwill,” which is an asset of the business and can be divided upon divorce. On the other hand, goodwill can be classified as “personal goodwill,” which is not subject to division upon divorce. Whether or not your business has goodwill, or whether such goodwill is “personal” or “enterprise,” is an extremely fact-sensitive analysis.
Application of Discounts. Finally, it is important to note the application of discounts used in valuing businesses. A valuation discount refers to the deficiency in value that a buyer estimates for a company compared to its peers in the same industry.6 In valuing a business, discounts are generally applied due to a lack of marketability and control. This mainly comes into play when an individual does not own 100% of a certain business. For example, say an individual owns 85% of a business. When it comes to valuing that business, it would be appropriate to apply a discount of 15% to arrive at a value representing that individual’s 85% ownership.
These types of situations are extremely fact-sensitive, and the above information is general in nature. Divorces are emotional times for all involved. Not only are they emotional, but often time complex, especially when it comes to property division. Obtaining skilled counsel is key to relieving some of the burdens that come with divorce. This blog was written by attorneys at Ciyou & Dixon, P.C. who handle divorces of all types throughout the state as well as a wide variety of business-related issues. It is written and posted for general educational purposes and is not to be construed as legal advice or solicitation for services. It is an advertisement.