How to Determine What a Business is Worth in a Divorce
The definition of business value:
The price that a willing buyer would pay a willing seller, each having full knowledge of all facts, and neither party is under any compulsion to sell or buy.
There are three main methods to use in valuing a business:
| Income | A business appraiser using the income method looks at only one thing - money the company can produce. This is the best method for professional practices, brokerages, advertising companies, and other companies that have few hard assets. The appraiser calculates income for the past few years, or the next few years. The resulting figure is put through a mathematical calculation to arrive at a final value. |
| Asset | A business appraiser using the asset method looks at the hard assets a company owns. This method is good for a business that owns lots of expensive things. Things like real estate, trucks, buildings, trademarks, machinery, or anything else that is highly valued. Some companies falling into this category are real estate investment firms, apartment complexes, construction firms, technology companies, etc. This method is unreliable for service oriented companies like doctors, dentists, lawyers, delivery firms, or other service providers. |
| Market | A business appraiser using the market method tries to find similar businesses that have been sold in the last couple of years. The businesses selected must be in the same type of business as the one to be valued. The best match would be a business offering the identical type of product or service, located in the same area. This is the most common sense of approaches because it shows what a real world buyer would pay the seller. Unfortunately, there may not be past sales information available for more than a few businesses. This method is excellent and very accurate if many comparable businesses have been recently sold and the sale prices are available. |
A business appraiser usually uses one or more methods and then averages them according to a selected formula. In a divorce proceeding, there are many ways to challenge or defend the calculated value.
Check back for additional information. In the next sixty days we will post detailed information for business owners or spouses of business owners who are facing divorce.
The Divorce Center can provide an experienced divorce attorney for a divorce involving family business ownership. This is one of the most challenging areas for a divorce attorney. We pride ourselves on keeping up with the latest information and strategies to meet this type of situation head on. CONTACT US NOW or call 888-469-3486