Will My Wife Be Entitled To My Business in a Divorce?

Many men ask if their wife will be entitled to their small business which was created during the marriage in a divorce. And in both equitable division and community property states, property acquired during marriage, including businesses can be divided by the court.

How is a small business valued? There are various methods of valuing a business. Of course, the inventory, the equipment and the accounts receivable will be used to calculate the value of the business. Unfortunately, most states also value the goodwill of the business. One of the common ways to value a business is called the excess earnings method. Under this method, an accountant will determine the net profits of the business along with the salary, draws, and perks of the owner (called the available cash flow) and then subtract the reasonable compensation of the owner if he were to perform the tasks for another company. Then that number is usually multiplied by a number between .5 and 5 based on the type of business.

Secret Divorce

Let’s take a closer look at the equation:

If Harry owned a business and he made $5,000 a month of salary, $2000 a month in perks, and the business made another $3000 per month, Harry’s available cash flow would be $10,000 per month. If it is determined that the reasonable compensation for Harry’s tasks performed is $5000 per month, we would deduct $5000 from $10,000 and would determine that the excess earning of the business was $5000 per month. The $5000 would be multiplied by 12 to determine a yearly income of $60,000. We would multiply the yearly excess earnings of $60,000 by the appropriate multiplier to determine the value of the business. Of course, this is only one of many methods to determine the value of the business. The value of the inventory, accounts receivable, and equipment will also be added to the final number in the excess earnings calculation.

Valuing a business is extremely expensive because it requires a forensic accountant and an attorney. Consult with Secret Divorce to learn means of reducing the value of your business for divorce purposes and to learn how settling cases involving small businesses can save you tens of thousands of dollars in a divorce.

This entry was posted on Sunday, March 5th, 2006 at 1:11 pm and is filed under Assets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.