When a marriage ends, does it also mean the end of a family-owned or entrepreneurial business? This question is likely to be faced by as many as 200,000 small business owners each year – and this number may be conservative. Small business creation is on the rise, as corporate jobs remain difficult to find. While more entrepreneurs look to create businesses, the stress of a start-up or the pressure of business operations can place additional burdens on a marriage, which can raise the divorce rate for small business owners.

As a result, business owners often find that the company they have built is viewed by spouses and the courts as an asset to be distributed in a divorce settlement. This is generally true regardless of the legal structure of the business.

Although a business may have a divorce plan (such as a pre/post-nuptial or a buy/sell agreement) in place to help with asset protection or distribution, most businesses don't have those kinds of plans. Furthermore, a buy/sell agreement may be of little help in creating an amicable asset distribution agreement because it may refer to an outdated value that doesn't necessarily reflect prices in today's market.

Divorce can place business owners in a terrible situation because the business may represent a majority of family assets, but the prospect of selling the business is daunting. Future value that could be created by the expansion of a family business won't be realized in the event of a company sale. And because family members are sometimes an integral part of the business, the sales price may not be reflective of a similar company value without those family members’ involvement and personal "goodwill," which is a company asset.

Any sale that is forced by the court may be rushed and result in the setting of an undesirable valuation. Even if the court does not force the company sale, however, one party may press for the sale of the business in order to reap immediate financial benefit. This is especially true when other family resources are limited.

This may result in dramatic – or even catastrophic – reduction in the long term wealth of the individuals involved or in greatly reducing the value of retirement plans.

How can understanding the value of a business help in a divorce situation?

Courts often refer people filing for divorce directly to mediators in order to keep the court system from becoming backlogged and to encourage couples to reach asset distribution settlements themselves. In that situation, it's vital for business owners to have a baseline value of their business going into those conversations on settlement.

Approaching a settlement negotiation without first getting an affordable, dispassionate view of the value of the business can lead to disaster. An owner’s personal perspective on value may have little relevance, as it may not turn out to be in line with an independent view forced by the court.

Many business owners have valuation metrics in the back of their minds that may not relate to today's market. Often, they have seen a "similar" business that sold, and they believe their business should sell for at least as much. This kind of reference point is just that, however – a single reference point.

Every business is unique in its own way. Therefore, it's important to understand that "average" values are just a mid-way point in the spectrum of business valuations. The typical range of business values within an industry is usually wide, meaning that many businesses in that industry sell for much more – or less – than the average. In fact, even businesses with similar attributes can ultimately sell for very different valuations.

In addition, understanding how different methodologies can be used to either increase or decrease valuation is essential. The true market value of a company is best considered within the context of a variety of valuation methodologies. Considering just one method for valuation, such as a “Rule-of-Thumb,” can greatly inflate or reduce the prospective company value. Each business is complex, and numerous approaches and factors should be considered before a fair market value is reached.

Gaining an initial, reliable, independent view of business value can greatly enhance the chance of a negotiated settlement, as the valuation can help bring expectations of the respective parties together with expediency. Conversely, in the event that a reasonable valuation perspective is rejected, an understanding of the various methodologies used in valuation is extremely helpful in divorce negotiations.

Once a baseline valuation is established, additional rationale can be applied to increase or decrease business value. For example, a waste disposal company might be subject to new regulations that are expected to be enacted next year. Although those regulations may not have been enacted yet, such an event could dramatically and legitimately reduce prospective profits and value into the future.

There are new and innovative services that can give accurate online valuation estimates. Such services are extremely inexpensive and are excellent resources for those going through a divorce. The initial valuation can give both parties a path by which the divorce could be settled without destroying business value or forcing the sale of the operating entity.

For example, if distributing some value from the business is necessary in a settlement, a distribution plan could be put into place which allows both parties to benefit. In this event, the non-involved spouse could realize cash distributions while the business remains intact and continues operations. This kind of agreement can usually be negotiated, but an accurate business valuation must come first.

No matter how a divorce involving the division of business assets is approached, an informed, third-party perspective on a company's value is essential to reaching an equitable agreement.

About the Author: Guy Cook is a Senior Partner at CreationWave, a consulting group focused on client growth and profitability results. He has held executive management positions at a number of high-tech, high-growth ventures, including CEO of SuperNet, which was sold to Qwest Communications for $24M. Mr. Cook thoroughly understands business valuation and currently consults with ValuSource.