Why Do I Need a Valuation? Family Law

Divorce can be complicated and if you own a business, it can be even more confusing.  If you owned a business when you got married, when you got separated or both, your lawyer will likely request a business valuation be prepared by a Chartered Business Valuator.

Why would your lawyer want even more information than you’ve already provided?

When going through a divorce, separation, or annulment of a marriage, one spouse may have the right to receive a portion of the property owned by the other spouse in order to “equalize” the property owned between them. This is usually called an “equalization payment.”

Put simply, the property considered for equalization is:

• The fair value of each spouse’s property when they separated,
• Less the fair value of each spouse’s property when they got married.
  The difference in fair value between the higher-value spouse and the lower-value spouse is then equalized.

Consider Joe and Lisa’s situation. Joe and Lisa were married in 2000 and separated in 2015. They both entered the marriage and left the marriage with different amounts of property:

Over the course of the marriage, Joe’s property increased by $300,000 and Lisa’s property increased by $385,000. In order to equalize these increases, Lisa would pay $42,500 to Joe, which is half of the difference between her increase and his increase. This way, both Joe and Lisa leave the marriage $342,500 richer than when they got married.

Many types of property, such as bank accounts and investments, are easy to equalize because the fair value is easily determinable. Property such as an ownership interest in a business, however, can be much more difficult to value and often requires the involvement of experts.

If part of the property Joe or Lisa owned when they got married was an interest in a business, then the fair value of the business needs to be determined first. Often the owner of a business has a rough idea of what their business is worth. However, that rough idea tends to be biased either too high (the owner may have unrealistic expectations of the earnings potential of the business) or too low (the business owner may want to minimize the equalization payment).

To achieve a bias-free fair value, a Chartered Business Valuator can be brought in to provide the business’s fair value.

If you feel you need a valuation for your separation agreement, give us a call and we’ll help you with the process.