Updated by Tracy Achen, Divorce Coach
FAQ Answer by Timothy McNamara, CDFA

Dividing marital assets during a divorce is never easy, but it becomes more complicated if a business is part of the equation. That’s why it’s important to understand the different aspects of divorce and business valuation if either spouse owns a company or small business. Below are some practical suggestions to keep in mind if you are facing this situation.

What is a business valuation?

A business valuation is a means of determining the value of a company, based on its financial performance, expected future cash flow, assets and liabilities, and current market conditions. Business valuations are often used when selling a business, for mergers, estate planning, securing financing, or in divorce proceeding. 

In this article, we will be focusing on its use in divorce proceeding. When one or both spouses own a business, it will generally need to have a value established to be able to divide it in a divorce settlement. In some divorces, the value of the business may also be a factor in determining the amount of alimony that may be ordered. 

When is a formal valuation necessary?

A formal valuation is often required when a business represents a significant portion of the marital estate or if there is a dispute over its value. A business valuation is also needed when a privately held business has substantial assets, profits, or a complex business structure.

It’s important to note there are situations where a business valuation may not be needed, such as:

• if the business isn’t a marital asset (for example, if it was established before the marriage or if it was inherited), 
• if both spouses agree on it’s value, 
• if the business has minimal assets, or 
• if the business is simply an income stream (like an in-home daycare or private house cleaning service).

How is a Small Business Valued in Divorce?

The three most common valuation methods for determining the value of a privately-owned business are the income/earnings based approach, the market value approach, and the asset-based approach.

Income/Earnings Based Approach

This method values a business based on its ability to generate future income. It uses the business’ past net profits to estimate the future income, which is then used to calculate its present value. The net present value is then divided by the capitalization rate, which is typically between 20% to 25% for small businesses.

For example, say a consulting business earns an average of $300,000 per year after normalizing expenses. If a valuation expert applies a capitalization rate of 20% , the value of the business would be estimated at $1.5 million ( $300,000 ÷ 0.20 = $1.5 million). This is the most complex method of valuing a business.

Market Value Approach

This method values a business by comparing it to similar businesses that have recently been sold. For example, say a similar local businesses sold for 3 times its annual earnings. For example, if your husband’s business earns $300,000 annually, the market value would be approximately $900,000 ($300,000 x 3 = $900,000).

Asset-Based Approach

This method values a business by subtracting liabilities from assets and is often used for asset-heavy businesses such as manufacturing. For example, say the business had assets that equaled $800,000 (inventory, equipment, and real estate) and $500,000 in liabilities (loans and debts). The value of the business would be $300,000 ($800,000 – $500,000 = $300,000)

The method used to value the business will depend on whether the business will be sold or if one or both spouses will continue to run the business.

Who Performs the Business Valuation?

Formal business valuations are generally performed by a licensed professional who is Accredited in Business Valuation (ABV), such as:

• certified public accountants with accreditation in business valuation (CPA/ABV), 
• certified valuation analysts (CVAs), 
• certified financial analysts (CFAs) with experience in appraising businesses.

If you’re wondering who will pay the for the professional business valuation, either spouse can hire and pay for their own expert. You can also jointly hire a business valuation professional as a way to reduce expenses and save time.

Divorce and business valuation – how it affects property division

A business is generally considered marital property if it was founded or acquired during the marriage, if either spouse made significant contributions to it’s growth, or if marital funds were invested in the business. In these situations, a business valuation is generally required to divide it’s value in the divorce settlement.

If the business was established before the marriage, and if the other spouse didn’t contribute money or labor to the business, it will generally not be considered a marital asset. The same is true if the business was inherited and the other spouse didn’t contribute to the business. In these situations, the value of the business would not be considered in the division of the marital estate.

If it is determined that the business if a marital asset, there are some options on how it’s value will be divided, such as: 

• the business owner buys out the other spouse’s interest in the business 
• the business owner swaps assets of equal value to retain ownership of the business 
• the business is sold and profits split between the spouses 
• the spouses remain co-owners of the business

It’s important to seek legal and financial advice from experts who are familiar with how business assets are valued and divided in a divorce. Doing so can help you protect your interests and reach a fair divorce settlement.

FAQ: How do I find out how much income his business generates?

Maggie’s Question: My husband is starting 2 new businesses in another state. My attorney advised me not to file for divorce until he is making closer to his previous income for alimony and child support. How can I find out how much money the business brings in?

Timothy’s Answer: There are several ways to learn what someone’s income is. One way is to simply ask. You would be surprised how successful this method can be. However, I understand this might not be an option for you and you may not feel comfortable you will get a true answer.

An alternative way is to file for a divorce and then get your lawyer to subpoena your husband’s business records. These financial documents contain an abundance of information and a skilled financial professional can assist you in examining these documents to establish what his income actually is. If you go this route, make sure you get a good CPA who is also an ABV – Accredited Business Valuator. CPAs with this designation have the skills, training, and experience needed to meet the stringent requirements of the ABV credential. You will want to have this person as he/she are experts in their profession.

It can be difficult to determine the income of a self-employed individual especially when the business in question is new. In a new business, startup costs often exceed any revenue and there may not be much left in the end. Additionally, the business will often pay many of its expenses and therefore even in a business with revenue, it may still show little income. While your husband’s expenses paid by the business are not a direct form of compensation, it can be very beneficial to him. These are often referred to as ‘perquisites’ and are often viewed as compensation when determining income.

If the business is not brand new, there should be a personal or business tax return depending on how the business is structured. If so, getting a hold of the actual return filed with the IRS is a good place to start. In order to get a copy of the return, you can use IRS form 4506 to request the original copy of the return filed with the IRS. This way, you know what you are getting is indeed the real thing and not a “second set of books.” On the other hand, if the business is new, this may not be an option. Whatever the case may be, please understand that starting and running a profitable business is very challenging and often, it takes time for a business to develop.

Sometimes in divorce, people get so caught up in both the emotional and financial issues of their lives, they overlook some very obvious things. In the case of your husband, having and running a successful and profitable business is in both of your best interests. Any intentional or accidental interference with the business or its ability to grow will only reduce your opportunity to benefit from its financial gain.

In closing, there are a number of things to consider when making the decision to file for a divorce and finances are a major concern. However, the decision to wait for your husband to make as much money as he once did in his prior career may be very disappointing, as that day may never come. While I can appreciate your attorney’s advice, it may not be in yours or your family’s best emotional interests.

As far as the future in concerned, support, both in the form of alimony and child support is modifiable. One suggestion would be to work with your attorney or mediator to help you reach an agreement that allows for the two of you to exchange tax returns every other year to learn if there is a “material change of circumstances.” This way if you husband is indeed earning a far greater income than when he first started, your support could be revised to reflect this adjustment.

Properly done, your attorney could help you reach an agreement that defines what this may look like. This will help the two of you avoid having to bring each other to court in the future to argue this point which can be both stressful and expensive.

While there is no “right” answer to your question, an option such as this would not only benefit you by allowing you to move forward with your divorce, but it may also reduce some stress in both of your lives. You can move on and your husband can focus his energies on running his new businesses and making them profitable.

© WomansDivorce.com. All rights reserved. | Updated January 1, 2026

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