There are approximately 35 MILLION small businesses in the United States which means small business income and ownership are common elements in mediating a divorce. Many small business owners are masters of their craft but often may not understand how their income and assets play into their divorce. This can affect child support, spousal maintenance, and asset division.
Small and medium businesses can be loosely divided into several categories:
Sole Proprietorships - Think of a specific individual who may be working alone offering a product or service. There is only one owner, and that person does all or nearly all of the work. If the owner left the business, there would be no business. Sole proprietorships likely have little or no value other than their physical assets.
Small Companies - These companies have employees, but the owner is probably very important to the operations of the business. There may be a couple partners. If the main owner were to leave, it would likely be very painful for the business, but it would likely survive. There may be some (potentially even significant) value to the business itself.
Closely Held Businesses - I am using this term to describe small and medium businesses that have grown and are likely more sophisticated. The founder may be involved but may be only a minority shareholder. Perhaps no single individual owns a majority of the business, and big decisions are made by a Board of Directors or the shareholder group.
This distinction can illuminate how to agree to a valuation of assets and income during the mediation process. The underlying value of the business and decision-making change among these categories which should affect how the business is viewed.
Read parts 2, 3 and 4 to learn more about each category.
Reference Calculations
Business valuation tends to focus on cash flow rather than net income, and EBITDA (see below) is generally used as a close surrogate for cash flow. Relevant calculations are likely to be similar to the following:
(+) Net Income of the business
(+) Interest expense
(+) Income taxes
(+) Depreciation and Amortization expense
EBITDA (earnings before interest, taxes, depreciation, and amortization)
(+) Personal expenses paid by the business
(+/-) Adjustment to market pay for business principal(s)
Adjusted EBITDA
(-) "Maintenance" Capital Expenditures
Adjusted EBITDA with Maintenance CapEx
IMPORTANT NOTE: This post reflects the opinion of the author relating to fairly evaluating net assets and income during the mediation process. It is not legal advice nor is it an indication of what a court may or may not order. Consult your attorney for legal advice.