Valuation and Vows: The Importance of Business Valuations in Prenuptial Agreements

Navigating the financial landscape of a marriage can be a complex and sensitive endeavor. Many couples choose to enter into a prenuptial agreement, or prenup, before marriage to outline the distribution of assets, financial responsibilities, and other pertinent matters in the event of a divorce, separation, or death. When one or both partners own a business, incorporating a business valuation into a prenuptial agreement is crucial. This not only ensures transparency but also sets clear financial expectations for the parties involved.

Understanding Business Valuation

A business valuation determines the value of a business or business ownership interest. By understanding the value of the business before getting married, a couple can prevent the business from being listed at an unknown or inaccurate value. This proactive approach helps avoid disputes over business value, saving both time and money in the event of a separation.

The valuation process typically involves understanding the company’s operations, analyzing the historical and projected financial information, assessing industry and economic conditions, and applying established valuation methodologies. In addition to the other financial line items included in a prenup, this will provide the parties with a value associated with the business.

Just as you would list your retirement account balance in a prenup, you should also include the value of any business interests. While a business valuation may be more cumbersome than accessing the balance of a retirement account from your recent statement, both are critical assets to present on your personal financial statement. Knowing their value upfront ensures transparency and fairness in the agreement.

Customizing your Valuation

Depending on your needs, different valuation deliverables are available. Each of the options below varies in cost, scope, valuation approaches, and the ending deliverable.

1. “Valuation Engagement” as defined by the AICPA

• Expresses the results of the valuation as a “conclusion of value.”
• Comprehensive valuation engagement that considers all three valuation approaches (asset, income, and market) in which the valuator provides an opinion of the Company’s value.
• It can be presented in a detailed report or a summary (abridged) report.

2. “Calculation Engagement” as defined by the AICPA

• Limited scope engagement in which the valuation analyst and client agree on the valuation approaches and methodologies.
• Flexibility to rely on analyst-prepared or management-prepared normalizing adjustments.
• May reduce the scope of the engagement by selecting specific agreed-upon valuation methodologies.

Prenup Valuation Benefits

Although you may think a business valuation is targeted at helping the business owner, it is actually a helpful exercise for both parties. For the non-owner spouse, a valuation provides an understanding of the business and its value. Even in the best-case scenario, knowing the value of the business will be helpful for financial planning and stability. It allows both parties to plan for their financial future with a clear understanding of their assets and liabilities. This can assist in setting financial goals, budgeting, and planning for retirement.

On the flip side, couples can reduce the likelihood of disagreements and potential litigation by having a well-documented prenup and clear values of business assets. This will not only reduce professional fees but also minimize the emotional toll that may transpire following a separation.

While the idea of getting a business valuation may seem daunting, it will help solidify your prenuptial agreement, enhance its enforceability, and leave less room for potential conflicts in the future.