Business Valuation in Divorce: Legal Methods and Court Standards

Business valuation in divorce determines the dollar worth of a privately held company, professional practice, or ownership stake when that asset falls within the marital estate subject to division. Courts in every U.S. jurisdiction require credible, methodology-grounded valuations before awarding or offsetting business interests in property settlements. The process involves specialized financial analysis, competing expert testimony, and judicial discretion governed by state property division frameworks and nationally recognized professional standards.

Definition and scope

A business valuation in the divorce context is a formal opinion of the economic value of a business interest expressed as a specific dollar amount as of a defined date — typically the date of filing, the date of separation, or the date of trial, depending on the applicable state rule. The American Institute of Certified Public Accountants (AICPA) and the American Society of Appraisers (ASA) each publish credentialing standards and methodological guidance that courts frequently cite when evaluating the reliability of expert opinions.

Scope depends on whether the business — or a portion of it — qualifies as marital property. Under marital property division laws, a business founded during the marriage is typically marital in full; one founded before marriage may have both separate and marital components. The distinction between separate vs. marital property in divorce directly controls which portion of the valuation enters the equitable distribution or community property calculation.

Valuation scope also requires identifying what type of interest is being valued: a 100% ownership stake, a minority interest subject to discounts, a professional practice with significant personal goodwill, or a partial interest in a partnership or LLC. Each carries materially different treatment under both financial standards and state case law.

How it works

Courts generally require a certified business valuation expert — commonly a Certified Valuation Analyst (CVA) credentialed through the National Association of Certified Valuators and Analysts (NACVA), or a Certified Public Accountant/Accredited in Business Valuation (CPA/ABV) through the AICPA — to produce a written report. That report must follow one or more of three recognized standard approaches:

1. Income approach — Capitalizes or discounts projected future earnings or cash flows to arrive at present value. Subvariants include the Capitalization of Earnings Method and the Discounted Cash Flow (DCF) Method. The DCF method requires projecting future cash flows across a defined period and selecting a discount rate reflecting risk.
2. Market approach — Compares the subject business to sales of guideline public companies or completed transactions of comparable private businesses. Relies on multiplier data from databases such as the IRS Revenue Ruling 59-60, which remains a foundational reference for valuation of closely held businesses (IRS Revenue Ruling 59-60).
3. Asset approach — Restates balance sheet assets and liabilities at fair market value. Most appropriate for asset-intensive businesses or when a company is not a going concern.

Courts may accept one method, blend methods, or appoint a neutral expert. In high-asset divorce legal considerations, competing experts for each party are the norm, and the court reconciles divergent opinions through a detailed evidentiary record developed during discovery in divorce proceedings.

A critical sub-issue is the treatment of goodwill. Enterprise goodwill — value attributable to the business's systems, brand, and customer relationships independent of the owner — is generally divisible. Personal goodwill — value tied to the owner's individual relationships, skill, or reputation — is excluded from the marital estate in a majority of states because it is not transferable and does not survive the owner's departure.

Common scenarios

Professional practices — Medical, dental, legal, and accounting practices present the highest personal-goodwill disputes. A physician's practice may carry significant enterprise value in its equipment, patient records system, and staff infrastructure, while the revenue attributable solely to the physician's board certifications and patient relationships constitutes personal goodwill.

S-corporations and pass-through entities — Tax treatment affects valuation. Experts must adjust for the "S-corp premium" or tax-affecting normalization, an area where courts in different states have reached opposite conclusions regarding whether a fictional corporate tax rate should reduce the entity's value.

Minority interest discounts — When only a partial ownership stake is marital property, the valuation may apply a Discount for Lack of Control (DLOC) or a Discount for Lack of Marketability (DLOM), each typically ranging from 15% to 40% of the pro-rata interest value, based on market studies published by sources including Duff & Phelps and Pratt's Stats.

Family businesses — Where both spouses have participated in operations, the valuation interacts with divorce financial disclosure requirements and wage normalization. Expert accountants adjust owner compensation to market-rate equivalents before applying income multiples.

Decision boundaries

Courts apply the "fair market value" standard in most jurisdictions — defined by the IRS as the price at which property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell (IRS Revenue Ruling 59-60). A minority of courts apply "fair value," which excludes minority and marketability discounts and produces a higher result for the non-owner spouse.

The valuation date is a binding threshold. A business that appreciated significantly between filing and trial will produce different values depending on the state's chosen date rule. This can mean a difference of hundreds of thousands of dollars in equitable offset or buyout obligation.

Judicial acceptance of expert testimony is governed federally by Federal Rule of Evidence 702, as interpreted through Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), which requires the methodology to be testable, peer-reviewed, and generally accepted. State courts apply analogous standards, and an expert report failing methodological scrutiny may be excluded entirely.

When a business interest intersects with retirement plans structured through the business, those components may require a separate QDRO or retirement asset analysis and are not typically absorbed into the business valuation itself.

References

• American Institute of Certified Public Accountants (AICPA) — ABV Credential and Business Valuation Standards
• American Society of Appraisers (ASA) — Business Valuation Standards
• National Association of Certified Valuators and Analysts (NACVA)
• IRS Revenue Ruling 59-60 — Valuation of Closely Held Corporate Stock
• Federal Rules of Evidence, Rule 702 — Testimony by Expert Witnesses
• Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993)
• Uniform Law Commission — Uniform Disposition of Community Property Rights Act