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What to know when a business is part of a divorce

Many people are starting their own businesses, either as a full-time endeavor or a way to supplement their income. When married couples get divorced, these businesses become part of the marital assets that must be divided according to Pennsylvania’s equitable division of property guidelines.

Even if only one spouse operated the business, it is likely considered marital property. The business may have been launched with household income, and the value of the business may have grown while both parties were married.

It’s possible for both spouses to maintain an interest in a business following divorce, but more often, one spouse buys out the other spouse’s share of a business. This raises the matter of properly valuing a business. There are many things to factor into determining the market value of a business, including:

Value of all assets – All equipment and inventory must be tallied. The business’s balance sheet minus liabilities is a start to determine the business’ worth.

Total revenue – How much a business generates in annual sales is an important factor in determining its value.

Discounted cash flow analysis – This uses a complex formula to analyze a business’ future free cash flow projections, and then discounts them using a required annual rate to arrive at a present value.

Working with valuation experts

As you can see, reaching the proper valuation of a business is a complex matter. Typically, a family law attorney will work with a business valuation specialist to reach a fair assessment to protect the interests of the client.

If a business was brought into a marriage by one spouse, it may not be considered marital property. However, if the value of the business grew substantially over the course of the marriage, that growth could be considered marital property.

In situations where a couple that is divorcing has complex assets such as a business, it is wise to work with a family law attorney who has experience in properly classifying marital and nonmarital property. Your lawyer should also have a network of highly regarded valuation specialists that can be called in if necessary.

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