Posted in Firm News
Dividing a business in a divorce is rarely straightforward. Unlike a bank account with a clear balance or a home with a market value, a privately held business requires a formal valuation process that involves financial expertise, professional judgment, and often significant disagreement between the parties. The number that comes out of that process directly shapes how much the business-owning spouse pays, or keeps, as part of the property settlement.
Understanding how valuation works helps business owners and their spouses make informed decisions rather than simply accepting whatever number the other side’s expert produces.
Why Business Valuation Is So Contested in Maryland Divorce
In Maryland, the marital portion of a business is subject to equitable distribution. That means the court must first determine what the business is worth, then decide what share of that value represents marital property, and then figure out how to address that value in the overall property division.
Each of those steps involves judgment calls that reasonable experts can disagree about significantly. A difference of opinion between two qualified appraisers on a mid-sized business can easily span hundreds of thousands of dollars. In cases involving larger companies, the gap between competing valuations can reach into the millions.
That’s why business valuation disputes are so frequently the central battlefield in high-asset Maryland divorces involving business owners.
The Three Primary Valuation Approaches
Forensic accountants and business appraisers use three recognized methodologies to value a business. Most appraisers consider all three and then weight them based on what makes the most sense given the type and size of the business.
The Income Approach values a business based on its ability to generate income in the future. The appraiser looks at historical earnings, normalizes them to remove anomalies and owner-specific expenses, projects future cash flows, and then applies a capitalization rate or discount rate to arrive at a present value. This approach is most commonly used for service businesses where future earnings are the primary driver of value.
The Market Approach values a business by comparing it to similar businesses that have recently sold. The appraiser identifies comparable transactions in the same industry and applies relevant multiples to the subject company’s financial metrics. This approach works best when there’s an active market for similar businesses and reliable comparable sale data is available.
The Asset Approach values a business by totaling the fair market value of its assets and subtracting its liabilities. This approach is most appropriate for asset-heavy businesses or holding companies where the underlying assets rather than ongoing operations drive value. For operating businesses, it often produces a lower value than the other two approaches.
The choice of methodology, and how much weight each approach receives, can significantly affect the outcome. A Bethesda business owner divorce lawyer works with qualified financial experts to evaluate which methodology produces the most defensible result given the specific nature of the business.
How Owner Compensation Affects the Valuation
One of the most contested issues in business valuations is how to treat owner compensation. Business owners often have significant discretion over how much they pay themselves, and that compensation directly affects reported profits.
An owner who takes a below-market salary inflates the business’s apparent profitability and thus its value. An owner who runs significant personal expenses through the business deflates reported profits and reduces apparent value. Forensic accountants adjust owner compensation to a market-rate salary as part of the normalization process, which can significantly change the income figures that drive the income approach valuation.
The other spouse’s attorney will scrutinize owner compensation closely. Personal expenses run through the business, benefits, vehicle allowances, and other perks all get examined to determine what the business is actually generating versus what the owner has chosen to report.
Marital vs. Non-Marital Portions of a Business
If a business was started before the marriage, not all of its current value is necessarily marital property. Maryland courts trace the value that existed at the time of marriage and separate it from growth that occurred during the marriage.
That tracing analysis involves its own complexity. Active appreciation during the marriage, meaning growth resulting from the efforts and contributions of the spouse, is generally treated as marital. Passive appreciation resulting from market forces independent of either spouse’s efforts may be treated differently.
A business that was worth $200,000 at the time of marriage and is worth $2 million at the time of divorce presents a very different picture than one that was started during the marriage and built entirely from marital efforts. Establishing the timeline and the nature of the growth requires both financial records and legal analysis.
Getting the Valuation Right From the Start
The business valuation process in a Maryland divorce starts with retaining a qualified expert, ideally a Certified Public Accountant with a business valuation credential like a Certified Valuation Analyst or Accredited in Business Valuation designation. The quality of the expert and the rigor of their methodology determines how well the valuation holds up when challenged.
Fait & DiLima Family Law works with experienced forensic accounting professionals in Maryland business owner divorce cases to make sure the valuation reflects the business’s actual value rather than a figure that favors the other side. If you’re a business owner facing divorce or a spouse of a business owner concerned about how the company will be valued, reach out to a Bethesda business owner divorce lawyer to discuss your situation and understand what the valuation process means for your case.
