For divorcing couples who own a business together, one part of the divorce property division process may be how they go about dividing their interests in that business. For that reason, divorcing couples should be familiar with the ways that a business may be valued for the purposes of dividing the interests in the business.
There are several main methods of business valuation.
The asset-based valuations total up all of the investments in the company. The asset-based approach looks at the company’s balance sheet, lists its total assets and subtracts its total liabilities to reach an asset-based value. Another type of asset-based valuation is a liquidation asset-based valuation which determines the liquidation value of the business which is the net cause value if all the assets were sold and liabilities paid off.
Market value approach
The market-based approach to valuation establishes the value of the business by comparing the business to similar businesses that have recently sold. There must be a sufficient number of similar business sales to make the comparison.
Earning value approach
The earning value approach bases the value of the business on its ability to produce wealth in the future. The first step is to project the company’s cash flows for 5 to 10 years out. Business valuation can be a complex process.
Once the business has been valued, there are also different methods of dividing a business during divorce that divorcing couples with a business should be familiar with. That is why it is so important to be aware of, and understand, the different business valuation options for their business.