Should I Have My Spouse's Business Evaluated

Many of my clients are self-employed. They may work alone, with their spouse and/or with employees. The question that comes up is what is the value of the business for divorce purposes and should the money be spent on a business appraisal.

The basic method of evaluation of this type of an asset is the determination of whether the owner receives excess income over and above reasonable compensation. In English that means does the owner make more money owning the business then he would if he were an employee doing the same type of work without the headaches of ownership.

If a spouse is self-employed and is a plumber and earns from the business $80,000 per year. The chances are that the business has no value and all that has been created is a job for the spouse as a plumber. If on the other hand the business is successful and the plumber/owner earns $180,000 then the business will most likely have value. The reason is that if the owner would have to pay an experienced plumber $80,000 to do the work and as a result of that the owner makes an additional $100,000 then the business has value. A person who buys the business wants to know whether he will make more money hiring an employee or doing the work himself compared to working as an employee elsewhere.

How much value the business has will depend on many factors including the nature of the work, the competition for the same work, whether there is a large customer base or just one or two customers who provide all the work, are there partners in the business that will not accept anyone else, how much of the work is there solely because of the "key employee/owner". Are businesses of this type sold or do they just fade away one day. Another valuation factor is whether there are personal expenses being paid by the business that are not proper business deductions.

Understanding a forensic accounting report is not easy. An experienced matrimonial attorney should be retained where this issue exists. Even after the report is prepared there are further issues regarding what percentage of the value should the non-owner be entitled to receive.