If you are going through a divorce, and you own a business, you will need to have a business valuation. This is true whether it was your business when you were coming into the marriage, if you started the business after marriage, or if it belongs to both you and your spouse. Business valuation methods used in divorce determines just how much a company is worth.
In a divorce case, business valuation professionals need to define the standard of value they are using before they start the appraisal process. This will either be the fair market value or fair value.
The fair market value is the price that the property would sell for if it were to be sold from a willing seller to a willing buyer when there is no compulsion to buy or sell. In some cases, discounts for lack of control or a discount for lack of marketability could be applied when determining the value.
The fair value standard can vary based on the context. Fair value is dictated by the court that has jurisdiction over the case. Discounts like those mentioned above are not used with the fair value standard.
Below are five of the common business valuation methods. Typically, one or more of these will be used to reach the valuation for the business. Let’s get a closer look at each of these.
This valuation method will look at all of the company’s assets, both tangible and intangible. The evaluator will find the market value or book value of those assets to get a better picture of the business’s worth.
Some of the types of items that are included in this manner of valuation include cash, equipment, inventory, patents, trademarks, options, stocks, real estate, and even customer relationships. Some of these elements, such as the customer relationships, will be more difficult to estimate. Others, such as cash and inventory, will be much easier.
Historical Earnings Valuation
Another means of getting the value of the company is to look at how the business has been doing historically. How successful has the company been? Elements used to get the value of the business includes the business’s gross income, its ability to repay debt, capitalization of cash flow, earnings. These can help to provide an estimated current value for the company.
When a company has problems bringing in enough money to cover all of the bills, the value of the company will naturally drop. However, repaying debts and having a positive cash flow shows that the company is doing better. This will improve the business value, increasing the valuation number.
Sometimes, the appraiser will use relative valuations to help them come up with the value of the business. To do this, they look for comparable businesses to see how much they would bring in if they were sold. The businesses must be as close as possible to the ones being valued in terms of their size, activities, equipment, etc.
If they are dissimilar, it would be difficult to come up with an approximate value for your business. When they are similar, however, it can provide a much better reasonable price for the property, which can be used for the valuation.
Discounted Cash Flow Valuation
In cases where the profits for the company aren’t expected to remain stable down the road, using the discount cash flow valuation method is recommended. With this method, it will take the future net cash flows from the business and discount them to the current values.
Having access to those numbers will make it easier to see how much your business is reasonably expected to make in the future. This can give you an idea of how much the business should be valued today, so things can be split properly during the divorce.
Future Maintainable Earnings Valuation
Your business’s profitability in the future will often depend on its current value. Using this valuation method is best when you believe that the profits from the company are likely to remain stable in the future. The appraiser will evaluate the business sales, expenses, profits, and gross profits from the past three years to determine what the future maintainable earnings are likely to be.
This valuation method helps get an idea of what the business value is today and what the earnings are likely to be in the future.
What Can’t Be Valued?
Although you can use the methods above to get an economic value of the company, certain things can’t be measured. You can’t measure the blood, sweat, and tears that were put into building the company. You can’t measure the sleepless nights you had when you were trying to get the business off the ground. You can’t measure the emotional value that you place in the company either.
Because these things aren’t used to provide a valuation for your business, it can often feel like you are fighting an uphill battle when you are trying to keep control of your business in a divorce.
If you are on the other side of the equation, and your spouse owns a business, it can sometimes be difficult to show just how much you helped that business in different ways. It can be hard to show that you deserve something from the effort that you put into the business. It can be even more difficult when you have a spouse that may commit fraud to try to protect their financial interests. You need some help.
Be Sure to Work with an Attorney
Discovering business valuation used in divorce can mean big changes for your business, and you want to proceed carefully. Ideally, you will be able to keep your business, but you may have to give your ex more in other assets to make up for the business. It can become complicated rather quickly, and it’s not something you want to do on your own. Always consult with an attorney about these matters, so you have a better chance of getting the results you want and feel you deserve.