Valuing a closely held business for property division purposes can be a challenging part of a divorce proceeding. You may want to bring in financial experts and accountants to help you get a more accurate idea of a business’s worth. There is no single approach or formula when it comes to business valuations. However, here are three of the more common methods to help put a price on a company.
1. A market-based approach
A market-based approach looks at the sale prices of similar businesses in the area to help determine a value. The drawback of this approach is that it uses and apples-to-apples comparison. Odds are there are some significant differences between you and your competitors. However, this can be a useful method for helping you get to an approximate value of the business.
2. An asset-based approach
This approach is about as straight-forward as it gets. The value of a company is figured out by adding up business assets while subtracting liabilities. A thorough process should consider both tangible assets, such as your inventory, and intangible assets, such as trademarks and customer lists. While this appears to be a relatively fair approach, there are still some things that an asset-based method can’t account for, such as goodwill that’s been built up over the years.
3. An income-based approach
Like an asset-based approach, this method also relies on a formula. In this case, an evaluator will normalize the costs of a business, such as salaries and expenses. The evaluator will then apply a capitalization rate to help determine a value. Unfortunately, the drawback to this approach is that it relies heavily on presumptions about the future performance of a business. You undoubtedly know that future performance is no guarantee.
Remember, your divorce can impact the value of a business
You should bear in mind the impact a divorce can have on a business. You could experience a disruption of your daily operations. There might also be an impact on your business partners or your employees. These upheavals could affect the valuation of the business.
Because business valuations are so complex, you need to work closely with a skilled legal professional who can help achieve an equitable division of property.