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Business Valuation in a Divorce

Business Valuation in Divorce

When going through a divorce, one of the areas that tend to have the most anger and vitriol is property distribution. Arizona is a community property state, which means that property and assets gained after marriage are generally going to belong to the community. Essentially, both spouses will have equal rights to that property, so it will be divided equitably.

While this might seem simple enough, it gets tricky when businesses are involved. This is because the business might be one of the most—or the most—valuable assets in the marriage. Both parties are likely to want to get their fair share of the business.

The value of the business will need to be determined, and then the parties will need to figure out how they can achieve a fair division of the business’s value or assets. Sometimes, this might require a buyout on the part of the person who wants to own the business. Other times, it might be deemed that one spouse has very little interest in the business, as it was kept separate, or it might not be owned by the community.

There are many permutations, and it will take attorneys, and often the court, to determine how things can be divided fairly. However, you can and should start to get a better idea of what is involved when businesses are part of a divorce.

What Assets Are Usually Considered When Valuing a Business

Most businesses will have both tangible and intangible features that will need to be valued. Let’s take a look at the differences between these sorts of assets.

Tangible assets are things like inventory, equipment, accounts receivable, and cash. These would be physical assets. Intangible assets are nonphysical assets. This would include things like patents, copyrights, trademarks, or even goodwill.

It’s important to note that even though the assets might go through valuation, it doesn’t always mean that everyone is going to agree with the results. Having two different experts provide valuation will often result in two different numbers. Typically, they will be close, but they aren’t likely to match exactly. This is because there are often subjective judgments that need to be made by the expert. That subjectivity results in differences in value.

What usually happens is that both of the parties involved in the divorce will hire their own experts to provide a business valuation. They will each create a formal report that gives their opinion as an expert.

The report will delve into their reasoning for the business valuation results. They will explain their opinions and how they reached their conclusions. Often, the judge in the case will be the one that determines what will be done based on the findings of those experts, as well as their own judgment.

Below, we will be looking at the main types of valuation methods that are often used in Arizona to help determine the value of a business that belongs to the community.

What Are the Valuation Methods

There are three approaches that could be used. This includes the asset approach, the income approach, and the market approach. Experts will choose one of these approaches and then determine the method they want to use to find the value.

You will discover that each of the approaches has certain strengths and weaknesses. The expert will need to determine which approaches should be used for the business they are valuing. After all, not all approaches will work well for all types of businesses. The business valuation experts need to make sure that their reports make it clear to the judge the actual value of the business, so they will strive to find the right approach for the job.

Let’s look at these three approaches.

The Asset Approach

Using the asset approach will determine the value of a business using methods that determine the value of the assets. It will typically include a value of all of the tangible and intangible assets, and any liabilities the company might have.

While this seems like a simple approach to take, it can be complicated. The value of certain types of asset classes or various intangible properties can be hard to determine. How can you determine the value of a copyright? Today, it might not be worth much, but in a year, the property could be worth millions.

The same is true of inventory. How much is the base value of the products in stock vs. how much they could sell for currently? This type of approach might work well when it is a small business or a professional practice.

The Income Approach

This approach determines business value using methods that take the anticipated economic benefits and present them as a single amount. As the name suggests, you are using the business’s income to determine the value.

This tends to be the approach that is most commonly used when valuing a business. A range of methodologies could be used when taking this approach. It might include the capitalized cash flow method, discounted cash flow method, or the excess cash flow method, for example. These all will determine the business’s future revenue stream, as well as the amount of risk the company faces.

This can provide a good valuation of the company. However, there is often a lot of subjectivity around this type of approach.

The Market Approach

Finally, there is the market approach, where the expert can use various methodologies as a means to compare the business with comparable businesses that have been sold recently. The idea behind this is simple. It’s believed that the value of a business can best be determined by looking at what comparable businesses have sold for because it shows the market value of that business. This is a relatively simple approach, but it is not always easy to find comparable properties, especially for niche companies.

Talk with an Expert

You want to be sure that the business is valued fairly in your divorce. Take the time to find an expert that can provide you with this valuation. Your attorney may have some referrals.

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