Ok, this isn’t a blog about Matt Damon or Ben Affleck, but if one of them ends up in a Hollywood divorce drama, it very well could be. Of course, California is a community property state and North Carolina is an equitable distribution state. Either way, dividing up the assets in a divorce is almost always sticky business.
We know that equitable doesn’t always mean equal but even if it’s going to be a 50/50 split, it’s never as straightforward as drawing a line down the middle. Figuring out how to allocate the different assets while taking into consideration tax effects of assets that are taxable versus those that are not, and at what tax rate, is just part of the problem. Throw in a family business and things suddenly get a lot more complicated.
What if one spouse is a sole proprietor or has an incorporated professional service practice of which they are the only employee? Think dentist, consultant, architect, accountant, attorney, to name a few. There are different components of the business that need to be considered: for example, fixed assets, liabilities, receivables, and of course goodwill. Goodwill is a gray area and can be interpreted differently by each party’s business appraiser. While no single methodology is perfect, some suggested methods of valuing goodwill are: market value (the amount offered by a bona fide potential buyer from an unrelated third party), capitalization of excess earnings (the earnings of the spouse in excess of what would have been earned by a person with similar education & experience in the same locale, percentage of earnings (based on a one-year average of gross income of the business) or comparables (sales of comparable practices that included a value for goodwill).
If I haven’t already lost your attention with the technicalities of goodwill valuation methods, I won’t go into the details of each of these methodologies for fear of doing so now. It’s not unusual for the business-owner spouse to claim “this business would be worth nothing without me” when faced with the prospect of having a value placed on it, of which he or she will have to split with the soon-to-be-ex. However, throwing in the towel and putting a zero dollar tag on that business probably won’t be acceptable to the other side…. so stand proud of the business that you’ve created and make sure you get a competent professional who is trained in the various methods of business valuation to make sure that the value placed on your business is as fair as fair can be.