Taking stock of one’s marital estate is a key aspect of divorce. Spouses have to identify marital property, including personal property acquired with marital income. They also need to determine what those assets are worth.
Particularly valuable assets can be relatively challenging to effectively value during divorce proceedings. If either spouse owns a business or professional practice, the company could become a point of contention in a pending divorce. One of the first issues spouses typically have to overcome is the business valuation process. Before they can negotiate solutions for addressing the organization, they first need to determine what it is worth.
How can people accurately establish the fair market value of a business?
There are multiple valuation methods available
The first step in the business valuation process is often the selection of the valuation method. There are numerous different strategies for calculating business value. A market capitalization method can help with larger businesses that have outside investors. By looking at share prices and outstanding shares, those who own publicly-traded businesses can determine what the company is worth.
Many family businesses may be limited liability companies (LLCs), partnerships or sole proprietorships. Different valuation methods, such as the times revenue method that looks at the industry and the current economy, can be helpful in such cases.
The earnings multiplier method or the discounted cash flow method involve comparing predicted cash flow and earnings with actual profits. A liquidation value represents what a company is worth based on the value of its assets after paying off its liabilities.
The challenges that arise during valuation
Spouses need to prepare for the possibility that the value of a business could change during a divorce. For example, in a professional practice scenario, the spouse running the business might set fewer appointments or stop taking on new clients to artificially decrease the valuation of the business. Temporary downturns in the economy or other operational challenges could also affect what the company is worth.
To prevent people taking advantage of those unfair fluctuations, spouses often have to agree on a valuation date as well as a valuation method. The non-owner spouse may need copies of prior financial reports to substantiate claims of intentionally diminishing revenue.
There are many potential challenges when valuing a business including scenarios where one spouse misrepresents the company’s finances or where spouses reach vastly different values for the company. Both business owners and their spouses often need someone advising them about the right approach to business valuation given their interest in the company, its function and their goals for the divorce.
Recognizing that a business is a high-value asset that is likely to complicate divorce proceedings can help people avoid unfair property division outcomes. Properly preparing for asset division generally requires determining the fair market value of key marital assets.