How Is a Business Valued in a New York Divorce?

A business started during the marriage using marital funds is generally marital property subject to equitable distribution under New York’s Domestic Relations Law (DRL §236(B)(5)). A business started before the marriage may have both a separate property component (pre-marital value) and a marital component (growth during the marriage). The analysis can be complex.

Even a business that is owned solely by one spouse may have a marital component if:

• It grew significantly in value during the marriage
• Marital funds were invested in it
• The non-owner spouse contributed to its growth through active involvement or by supporting the family while the owner built the business

Business valuation in divorce is not a simple calculation. Certified business valuators (CBVs) or certified public accountants use one of three primary approaches:

Income approach: The most common method for operating businesses. The valuator determines the business's earnings capacity — typically using a normalized version of historical earnings — and capitalizes them at an appropriate rate to arrive at present value. This requires adjusting for owner's salary (if above or below market) and non-recurring expenses.

Market approach: Compares the business to recent sales of similar companies in the same industry and geography. This works best for businesses where comparable transactions exist but can be difficult for unique or niche businesses.

Asset approach: Values the business based on its net assets (what it owns minus what it owes). Most appropriate for asset-heavy businesses or those being wound down rather than ongoing operations.

Before any methodology is applied, the parties (and ultimately the court) must agree on the valuation date — the snapshot in time at which the business is being valued. New York courts treat this question by asset type:

• Active assets — including most operating businesses, where one or both spouses contribute to growth — are typically valued as of the date of commencement of the divorce action.
• Passive assets — investments that grow on their own without managerial effort — are typically valued closer to the date of trial, capturing market movement during the pendency of the case.

The active/passive line is rarely as clean as it sounds. A spouse who continues running the business through litigation may argue the post-commencement growth was the product of personal effort (separate); the other spouse may argue it was a continuation of marital momentum (marital). Where on that line a particular business sits is fact-specific and one of the most heavily contested questions in any high-asset divorce.

Practical implication: in cases involving an operating business, the date you file the divorce action can lock in or lock out months — sometimes years — of value. This is one reason it is worth talking to an experienced high-net-worth divorce attorney before the case is filed, not after.

One of the most contested issues in business valuation divorces is goodwill — the intangible value of a business beyond its hard assets. New York distinguishes between:

• Enterprise goodwill: Value that exists independently of the owner — established client relationships, brand reputation, trained staff — and is considered marital property.
• Personal goodwill: Value that exists only because of the specific owner's skills, reputation, or relationships, and that would not transfer with a sale. This is generally treated as separate property in New York.

Determining how much of a business's goodwill is enterprise vs. personal is a major battleground in many divorces involving professional practices (law firms, medical practices, accounting firms).

In contested cases, each spouse typically retains their own business valuator. It is common for the two experts to arrive at dramatically different numbers — sometimes millions of dollars apart. The court then weighs the methodology, qualifications, and credibility of each expert in reaching its own conclusion.

This means the quality of the expert you hire and the way your attorney cross-examines the opposing expert can have an enormous impact on the outcome.

Business owners facing divorce have several strategic options:

• Negotiate a buyout: Pay your spouse a lump sum or offset with other assets (real estate, retirement accounts) in exchange for keeping the business intact.
• Structure a payment plan: If a lump sum isn't feasible, courts sometimes allow installment payments over time.
• Co-ownership: Rare and typically not recommended, but in some cases spouses continue to own a business together post-divorce.
• Sell and divide proceeds: If neither spouse can buy the other out, a court may order the business sold.

A prenuptial agreement negotiated before marriage can protect a business from being divided in the event of divorce. If you own a business and are considering marriage, this is worth discussing with an attorney.

Weinrieb Law works with experienced financial experts to ensure business assets are properly valued and that our clients receive fair outcomes — whether protecting a business or ensuring a fair share of its value.