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How is a business’s worth determined during divorce?

On Behalf of | Jul 28, 2021 | Divorce

If you’re a business owner headed toward divorce, then you’re probably worried about what’s going to happen to the company that you worked so hard to build. That’s understandable. After all, in an equitable division state like ours, your spouse likely has some financial interest in your business. In order to better determine your spouse’s interest in your business you’ll have to consider a number of factors, such as when you acquired the business, how much it has appreciated during the course of your marriage, and the contributions your spouse has made to the business.

But this week we want to look at another complicated issue when a business is wrapped up in divorce: business valuation.

The importance of business valuation

Properly valuating a business is crucial. The value assigned to your business can have a tremendous impact on the amount of money that your spouse is able to get from it during the property division process. While you may want to argue that the business’s value is low, your spouse will probably argue the opposite. This is where a professional valuation can provide clarity and fairness.

How businesses are valuated

There are several approaches that can be utilized to value a business. The asset method simply tallies all assets and subtracts liabilities to reach an ascertained value. This approach can be difficult because some assets are hard to give an appropriate value.

The market approach utilizes comparable business sales in the area to give an estimate of the value of your business. The biggest challenge here is that there may not be any comparable business sales in your area.

A third method is the income approach. Here, your business’s history of cash flow is extrapolated into the future while taking a number of factors into consideration. This gives an idea of the what business is worth moving forward.

Know how to protect your business in your divorce

This is a very surface overview of some ways in which businesses are valuated during the divorce process. There are a lot of nuances involved in the process, including selecting the expert who will conduct the valuation and arguing the finer points of the valuation itself, which is why it might be in your best interests to have the assistance of a qualified legal professional on your side when dealing with these matters.