At Frank Amar Matura, we understand how challenging it can be to go through a divorce. It is emotionally draining, especially when there are complex financial matters involved. Determining the appropriate division or allocation of business assets owned by one or both spouses is one factor that can complicate matters. In this newsletter, our Phoenix divorce lawyers discuss the role of business valuation in Arizona divorces and the options for distributing or allocating business assets.

The Importance of Accurate Business Valuation in Arizona Divorces

Arizona is a community property state, as outlined in the Arizona Revised Statutes § 25-211. The law states that all property acquired by either spouse during the marriage is community property, with the exception of assets that were inherited or gifted to one spouse.

The Arizona Revised Statutes § 25-318 states that community property is to be distributed equitably. This applies to business assets that were acquired by either party during the marriage. Here, we explain how community property laws apply to business assets and why accurate business valuation in Arizona divorces is critical.

Business Assets in Divorce: Is Your Business Community or Separate Property?

If your business is owned jointly by you and your spouse, it is considered community property. It is also community property if you acquired the business during the marriage, even if your spouse does not share ownership—unless you inherited the business or it was gifted to you.

When one spouse owned a business before the marriage, the business is the separate property of that spouse and is not considered community property. However, income generated by the business, and any increase in the business’ value during the marriage, likely will be considered community property, especially if the other spouse contributed to the company’s growth.

Methods for Business Valuation in Arizona Divorces

When business assets are deemed community property, a valuation of those assets will need to occur so they can be divided equitably along with other marital assets.

When it comes to figuring out the value of a company, one of three methods of appraisal is generally used:

• Market value;
• Income value; or
• Asset value.

Market value is determined by evaluating the value of other similar businesses in your market that have recently been sold. This method can be useful if the market is active and other similar businesses have recently been sold. If limited data is available for similar companies, however, this approach may not be ideal.

The income value approach reviews the company’s income and financial records to determine future prospects and risks. Because this involves some speculation regarding the future trajectory of the business, this method may not provide the most accurate valuation. However, it can be useful in some cases and is commonly used to value small businesses.

The asset value approach estimates the value of all assets of the company, including intangible assets like goodwill and name recognition. Liabilities are assessed and subtracted from the total value to provide the valuation. This method can be more complex than the others, but, done properly, it can provide an accurate point-in-time value for the business.

Strategies for Protecting Business Assets in Divorce

If you are considering marriage and own a business, there are strategies you can use to protect that business in order to assure that it will remain your separate property, even in the event of a divorce. One effective strategy is considering a prenuptial agreement before getting married. Lucky for couples in Arizona, prenuptial agreements are recognized and enforceable.

Prenuptial agreements allow couples to identify the assets that shall remain separate and which assets shall be considered community property, and explain how their assets will be divided in the event of a divorce. It is crucial for business owners to clearly outline the ownership and distribution of their company before marriage; this kind of agreement provides protection and clarity. To ensure that this agreement meets all legal requirements, it is important to consult with a knowledgeable family law attorney who can guide you through the process.

Another protective measure to consider is a buy-sell agreement. This is a contract that dictates what happens to a business when certain events occur, such as divorce. Business owners can include conditions in the buy-sell that deal with how assets are divided, and protect their interests and business stability.

In the absence of a prenuptial agreement that includes business assets or a buy-sell agreement, the parties and the court must determine the best way to equitably distribute all marital property, including business assets that are community property.

Although community property is generally divided essentially equally, this does not mean that each asset must be distributed 50/50 to each spouse. The total value of all marital property just has to be divided equitably. Therefore, a business owner whose spouse is entitled to a portion of business assets can agree to allocate other assets from the marital pot to the other party to make the overall division equitable. This is often referred to as an equalization payment.

Seeking Professional Guidance for Business Valuation in Arizona Divorces

Seeking the guidance of a skilled attorney is vital when divorce and business valuation are intermingled. Business owners and spouses need clarity about how much their business assets are worth and guidance on how those assets may be divided. An experienced attorney can help navigate the complexities of property and business valuation. They will look at every key aspect, including market conditions, future earnings, and the unique nature of the business to ensure nothing is missed. They can also employ valuation experts to assist in determining what the business is worth and the share that each party should receive.

At Frank Amar Matura Family Law, we understand the significance of consulting with experienced attorneys who are skilled in divorce and business valuation. We encourage all business owners and spouses to proactively protect their interests and seek professional guidance tailored to their unique circumstances.

Don’t leave the fate of your business assets to chance. Contact us today at 602-922-9989 or fill out our online contact form to schedule a consultation to discuss business valuation in Arizona divorces and get feedback on your case. Your business assets deserve the utmost protection, and our knowledgeable Phoenix divorce lawyers are here to help you navigate the complexities of divorce with confidence.