Company Valuation in Case of Divorce

Divorce is a process in which a marriage is dissolved, and among other things, you have to decide how to divide the property. When it comes to property whose value is known - such as a pension fund - the division of the property is relatively simple. But what happens when one of the spouses has a business? In this case, the division of property is much more complex.

This blog post will discuss the main points to consider when estimating a company's value in a divorce proceeding.

Company valuation in case of divorce

In every valuation, it is necessary to examine various aspects of the valuation - which valuation method to use, what are the future growth rates of the business, what is the weighted average cost of capital, and more. When talking about a valuation in the case of a divorce - there are additional aspects that the valuer must take into account and which may significantly affect the value of the company:

• Were artificial accounting operations performed?
• Will the spouse who owns the business continue to hold the company?

Have artificial accounting operations been taken out that has the power to affect the company's value?

In the case of a divorce, there are two opposing forces - one will want to reduce the company's value, and the other will want to maximize the company's value. Let's assume that the husband is the shareholder in the company. In the event of a divorce, his interest will be that the company's value will decrease. On the other hand, the woman's interest would have a conflicting interest. She will strive for the company's value to increase and be maximal. Since the husband owns the company, he influences what is done in the company. He can take various divorce actions that can reduce the company's value.

Therefore - when it comes to evaluating the value of a company in the case of a divorce, it is necessary to examine whether artificial accounting operations were carried out whose purpose was to reduce the value of the company. These actions can include, for example:

• Giving an artificial loan, for example, to the husband's associates increases the company's debts. Expanding the company's obligations will lead to a reduction in the company's value.
• Are relatively high expenses recorded, which reduce the company's profits? As you might expect, reducing profits will reduce the company's value.
• To reduce the company's income, postpone the production of invoices. Similar to the previous section - this action will reduce the company's value.

Other actions can be taken before the divorce, affecting the company's value.

Will the spouse who owns the business continue to hold the company?

When it comes to valuation in the case of a divorce - the question is crucial - who will own the company after the divorce? If the shareholder continues to hold the company, the company's shares will not be sold to a third party, and as a result, no tax event will apply.

If, on the other hand, there is an intention to sell the company, the valuation must take this into account. It should be examined whether the tax will be paid on the sale. Furthermore - in case of a tax payment - what is the tax rate? That is - in the case of a valuation due to divorce - the tax to be paid, if it is delivered, must be reduced from the value of the company.