If you or your spouse owns a business, that business is probably the biggest number in your divorce. It’s also the hardest one to pin down. A house gets an appraisal most people can follow. A business, on the other hand, gets a 60 page report full of terms like “capitalization rate” and “normalized cash flow,” and one side’s expert says the company is worth twice what the other side’s expert says.
This post explains how a business valuation works in a Washington divorce in plain English. It’s the first in a series. The next posts cover the three methods appraisers use, the judgment calls that move the number, and how to read the report you just got handed.
Why the business gets valued
Washington is a community property state. In a divorce, the court divides all property, community and separate, in whatever way is “just and equitable” under RCW 26.09.080. A business started or grown during the marriage is usually community property, at least in part. Even a business one spouse started before the marriage can have a community component if it grew because of work done during the marriage.
Here’s the practical part. Courts almost never split the business itself. Nobody wants divorced spouses as forced business partners. Instead, the court values the business, awards it to the spouse who runs it, and gives the other spouse offsetting assets or a payment. The valuation number decides how big that offset is. That’s why both sides look at it so closely.
Who does the valuation
Credentialed appraisers handle business valuations, often CPAs with valuation credentials like ABV (Accredited in Business Valuation), ASA (Accredited Senior Appraiser), or CVA (Certified Valuation Analyst). Not every valuator is a CPA, and a valuation credential isn’t a forensic accounting credential, so it’s worth checking what the expert is actually licensed and credentialed to do. One spouse hires an expert, or the parties agree on a joint expert. In a contested case, each side may have their own.
One thing worth knowing up front: a standard valuation engagement is not an audit. The appraiser typically accepts the company’s financial statements and tax returns without verifying them, and the report says so in the fine print. So if the books are wrong, the value is wrong. That’s why the discovery phase (gathering bank records, payroll, loan documents) matters so much in business valuation cases.
Four decisions that shape the number
Before the math starts, the appraiser makes framing decisions that shape everything downstream.
Standard of value. This is the definition of “value” being used. Fair market value asks what a hypothetical willing buyer would pay a willing seller, neither under pressure. Some appraisers in divorce cases use a “value to the holder” concept instead, which asks what the business is worth to the spouse who keeps it, even if it couldn’t be sold for that. The choice can swing the number substantially, especially for businesses built around one person.
Premise of value. Is the company valued as a going concern (it keeps operating) or in liquidation (assets sold off, doors closed)? Almost all divorce valuations use going concern, but the premise matters for struggling businesses.
Level of value. Is the interest a controlling interest or a minority stake? A 100% owner can sell the company, set salaries, and take distributions. A 20% owner can’t. Appraisers apply discounts for lack of control and lack of marketability (how hard it is to convert the interest to cash) when the facts support them. Those discounts can cut a value by a third or more, so the parties often dispute whether they apply.
Valuation date. The fourth decision is what date the business gets valued as of. This one matters enough that it gets its own section next.
The valuation date
Values change over time, and the date matters. In Washington, courts typically value assets as of the time of trial. See In re Marriage of Harrison, 172 Wn. App. 1006 (Div. III 2012), an unpublished decision, meaning courts may consider it but it isn’t binding precedent. But the court has discretion to pick a different date when the facts call for it. In In re Marriage of Griswold, 112 Wn. App. 333, 351, 48 P.3d 1018 (2002), the court used a separation date appraisal instead of one done three years later, so the spouse responsible for letting the asset decline shouldered that loss alone.
Meanwhile, appraisers usually build their reports on a year-end date months before trial, and most reports say the appraiser has no duty to update after the report date. That gap can be important. If the Court values the business as of the time of trial, a report built on numbers from 12 or 18 months earlier isn’t measuring the thing the court is dividing. Revenue may have grown or dropped, cash may have built up or been spent, key employees may have left.
It often makes sense to have your expert update the valuation to a date closer to trial. The updated number reflects the business the court is actually looking at, not a snapshot from a year ago. An update costs less than the original report, and it takes away the other side’s easiest criticism: that your number is stale.
What counts as goodwill
Most profitable small businesses are worth more than their trucks, tools, and bank accounts. That extra value is goodwill: reputation, customer relationships, an established name, a trained crew. Washington has long recognized goodwill as property a court can value and divide in a divorce, going back to In re Marriage of Hall, 103 Wn.2d 236 (1984), which also confirmed there’s no single required method for valuing it.
Goodwill disagreements usually come down to how much of the value is really the business versus the person. For example, if every customer would follow the owner out the door, the “business” may not be worth much without them. So appraisers and courts have to draw that line case by case.
What’s actually in the report
A typical report walks through the same sequence:
- Company and industry background. What the business does, its history, its market, and economic conditions on the valuation date.
- Financial statement analysis. Usually five years of income statements and balance sheets, with trends.
- Normalization adjustments. The appraiser adjusts the books to show what a typical owner would really earn. The appraiser resets owner salary to market rate, adds back personal expenses run through the business, and adjusts related party rent to market. These adjustments are judgment calls, and they’re often where the two experts diverge most.
- The valuation approaches. Income, market, and asset based approaches, covered in the next post.
- The conclusion of value. A single number or range, plus the assumptions and limiting conditions behind it.
Federal guidance the profession leans on, like the IRS framework for valuing closely held companies, lists the factors appraisers should weigh: the nature of the business, economic outlook, earning capacity, dividend capacity, goodwill, and past sales of the stock. You can see the IRS’s own materials on its valuation of assets page.
A quick example
Take a made up company, Evergreen Plumbing. Sam started it during the marriage. It runs six vans, employs ten people, and clears about $200,000 a year in cash flow after Sam’s market rate salary. The equipment and bank accounts net out to $350,000.
Is Evergreen worth $350,000 (what the stuff is worth)? Or closer to $1.3 million (what an investor would pay for a $200,000 income stream)? Surprisingly, both numbers can come out of legitimate methods. Which method fits, and what assumptions feed it, is what the rest of this series is about.
What this means for you
First, if you own the business, understand that the value on paper becomes a real debt to your spouse, so inflated numbers hurt you twice. If your spouse owns the business, understand that the company keeps its books for taxes, not for showing true value, and a good appraiser has to dig. Either way, don’t accept or challenge a valuation until someone has walked you through the assumptions inside it.
We handle divorces involving businesses and professional practices in Snohomish, Island, and King Counties. Call us at (425) 954-5578 or schedule a consultation.
This post is the first in our series on business valuation in divorce. The next posts cover the three ways appraisers value a business, the judgment calls behind the numbers, and how to read a valuation report.
This article is general information, not legal advice. Every case is different. If you’re facing a divorce involving a business, talk to an attorney.