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3 ways to value a business during a divorce

On Behalf of | Feb 2, 2023 | Divorce

Any divorce involving significant assets will have its complications, but one of the most common is trying to determine what a family business (or, at least, the business belonging to one of the people involved) is worth.

Valuation of the business is one of the first steps that you need to take in order to understand what part it will play in the distribution of the marital estate. But, how do you make the process fair?

There are 3 main methods of valuation

Generally, you need to come to an agreement with your spouse on the best way to value the business before you start any negotiations. While each method has its advantages and disadvantages, there are three common routes you can go:

  1. Income valuation: This is probably the simplest and easiest method to use because you merely need to look at the company’s past income and future income projections and use that as a basis for its value. That can work well if the income is fairly stable and predictable.
  2.  Market valuation: Sometimes a business is worth more on the open market than it would seem from its books. That’s especially true in the tech industry, where small companies are sometimes sold for a great deal of money because of the intellectual property they hold. However, finding enough other comparable businesses to draw good conclusions may be difficult.
  3.  Asset valuation: Maybe the family business is asset-heavy and income-poor right now. Equipment, inventory, vehicles, real estate and even the accounts receivable can be used to offset a company’s debts and give a clearer picture of its true worth.

What’s perhaps most critical to understand is that each of these methods may produce different results, and that can ultimately affect how much you receive in the divorce.

It’s also important to recognize that you and your spouse can eliminate a lot of conflicts if you’re willing to agree to the method of valuation in advance.

When there’s a lot of property involved in a divorce, it’s wise to get early legal guidance so that you can protect your interests, including the goals you have for the future.

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Attorney Harvey S Lutins