Divorce business valuation requires an expert, typically an accountant who has been specially trained and certified in business valuation. While working on a settlement agreement or preparing for a divorce trial, a divorce lawyer would retain and work with a valuation expert to estimate the value of the business.
There are three different methods that may be used to value business assets in a divorce. The methods are not mutually exclusive, and the expert hired by the family law lawyer valuing the property may use all three methods to find a reliable amount for the business. The three approaches are:
- Cost Approach: This approach looks at the fair market value of the business assets minus liabilities. This method is used to value a business that is not making money or to establish a floor value for the business. The asset approach is best used when the business has many assets that are easily valued. It can be difficult to value a business under this approach if the business has a lot of intangible property or other property that is difficult to value.
- Income Approach: This approach looks at the expected income of a business, as well as the level of risk, and determines the present value of these future benefits. Things considered include cash flows and future benefit streams.
- Market Approach: This approach values a business by comparing it to other similar businesses. Basically, we will look at “comps” to determine the value of the business.
The Market Approach works well when similar businesses are bought and sold on a regular basis. Then the business can be valued in much the same way that real estate is valued: by looking at recent sales of similar properties and then making adjustments for differences.
The Income Approach multiplies the income the owner receives from the business to calculate an initial estimate of value. This is similar to the price earnings ratio of a publicity traded company. Adjustments to the estimate are then made based on the particular features of the business.
The Asset Approach is rarely used. It looks at the assets owned by the business to estimate a value. These can be both tangible and intangible assets. Some tangible assets include:
- Buildings and Real Property
- Other Physical Assets
Intangible assets that a business may own include:
- Trademarks and Goodwill
- Contracts and Agreements
- Anything of Value Not in Physical Form
This method is rarely used because most business are valuable because of the income stream they produce, rather than the assets they own.
Divorce business valuation is an art rather than a science. Often in divorce both the husband’s lawyer and the wife’s lawyer will each hire their own valuation expert. The resulting valuations will often differ by a factor of five and can differ by a factor of ten. An expensive courtroom battle of experts may then result. In such a situation, settlement can become impossible.
While we are experienced in such battles, most people involved in a divorce would rather settle their issues without undue expense. One solution is for the parties to jointly hire one valuation expert that everyone has confidence in. A single valuation for the business facilitates settlement negotiations. Even if settlement negotiations still fail, a single value for the business streamlines the divorce trial as well.