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Challenges to valuing your business in a divorce

If you are a business owner going through a divorce, you are likely concerned not only about the future of your marriage - but the future of your business too. Unique challenges arise when the valuation of your business is considered as part of divorce proceedings.

Your business is your most valuable financial asset. Yet, when dividing marital assets, the role your spouse has in deciding the future of your business may now be larger than ever before. Illinois state law encourages equitable distribution of property among divorcing spouses. This ruling means that your business could be split into portions based on the contributions you and your spouse made to its value.

Here are three challenges you could face in valuing your business during a divorce:

1. Did you pay yourself a competitive salary?

As business owners, we often pay ourselves just enough to get by with the rest of the profit remaining in the value of the business. While putting profits back into your operation is a smart business decision, it can backfire during a divorce.

Your spouse could claim that he or she did not receive a sustainable benefit from your business and, therefore, could be entitled to a larger portion of assets following a divorce.

2. Are there extenuating arrangements?

Your divorce could also have an effect on your business arrangement. Did you sign a prenuptial agreement to protect certain aspects of your business? Are you business partners with your spouse? Could your divorce affect partnership in an LLC or similar arrangement?

The answer to each of these questions is worth discussing with your attorney. Once the divorce proceedings have begun, it is likely too late to consider how you could have protected your business, but early discussions could help you gain better control of its future through the proceedings.

3. How much is your business actually worth?

The valuation of your business differs depending on the circumstances. The structure of your business after a divorce could determine its value to you and your spouse during the proceedings.

There are three approaches to business valuation: the asset approach (how much is my business worth to me?), the market approach (how much is my business worth to a buyer?) and the income approach (how much is my business worth now or in the future?).

Business division in a divorce is one of the most complicated areas of family law, but with the right guidance, you can reach an equitable resolution for both your divorce and your business.

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