Illinois Divorce Lawyer Blog
Valuing a Small or Medium-Sized Business in an Illinois Divorce
When a couple divorces in Illinois and one or both spouses own a business, determining the value of that business is an essential step in dividing marital property fairly. Illinois law treats closely held businesses as marital property to the extent they were created or grew during the marriage. The court must therefore determine the business’s fair market value as of or near the date of dissolution.
1. Common Valuation Methods in Illinois Divorces
Illinois courts recognize several accepted methods for valuing small and medium-sized businesses in divorce proceedings:
A. Asset-Based Approach
The asset-based method totals the business’s tangible and intangible assets (like equipment, accounts receivable, and goodwill) and subtracts liabilities. This approach is common when valuing professional practices or asset-heavy businesses. In In re Marriage of Schneider, 214 Ill. 2d 152 (2005), for instance, the court considered expert testimony regarding the valuation of a dental practice, including both tangible assets and goodwill as part of its going-concern value.[1]
Courts have emphasized that valuation should account for fixed assets, properly aged accounts receivable, and intangible assets like goodwill, while also deducting business-related liabilities. See In re Marriage of Davis, 131 Ill. App. 3d 1065, 1069 (Ill. App. Ct. 1985); In re Marriage of Wilson, 110 Ill. App. 3d 809, 813–14 (Ill. App. Ct. 1982).*[1]
B. Income or Earnings Approach
The income approach values a business based on its ability to generate future income, which is then discounted to present value. This method is often used for service or professional firms. Courts look at historical earnings, projected cash flows, and normalized salary adjustments. The idea is to determine what value would reflect expected income after accounting for the owner’s personal efforts.
C. Market Approach
The market approach compares the business to similar businesses that have been sold in recent transactions. This method is most effective when reliable market data exist for comparable companies. However, for small or unique businesses, finding truly comparable data can be difficult.
2. The Role of Goodwill
One of the most debated aspects in Illinois business valuation is “goodwill” — the intangible value of a business beyond its tangible assets. Illinois distinguishes between two types:
- Enterprise goodwill, which attaches to the business itself and is marital property.
- Personal goodwill, which is tied to the individual owner’s skills or reputation, and generally is not marital property.
This distinction was key in cases like In re Marriage of Zells, 143 Ill. 2d 251 (1991) where the Illinois Supreme Court held that personal goodwill cannot be treated as a divisible marital asset because it has no transferable value apart from the individual’s professional efforts.
3. Expert Testimony in Valuation
Business valuation often hinges on expert opinions from CPAs, appraisers, or valuation analysts. In Schneider, the court weighed competing expert valuations, recognizing that valuation is “an inexact science” and that trial courts have discretion to adopt one expert’s methodology over another based on credibility and supporting evidence.
4. Practical Takeaway for Illinois Divorces
For divorcing business owners, a sound valuation can make a significant difference in the property division outcome. A professional valuation is not just about numbers—it helps ensure fairness and clarity during an emotionally and financially complex process. Contact Michael Roe if you have questions about this common issue in divorce litigation.