Determining the future of your business amidst a divorce is complex. After all, a business is often one of the largest marital assets. Many business owners use a professional valuation to understand the business’s worth. Spouses, attorneys, and the court can use the valuation to make decisions and support an equitable division of assets. In this article, we discuss how to value a business in a divorce and how to use the valuation during the divorce process.
Peak Business Valuation has extensive experience valuing businesses during divorce. If you are seeking an objective and credible valuation of your company, contact Peak. We can answer your questions and provide a valuation to suit your needs. Schedule a free consultation with Peak today to learn more!
What is a Business Valuation in a Divorce?
A business valuation provides an objective estimate of a business’s value during a divorce. Business appraisers use the appropriate standard of value, such as fair market value, to reach that conclusion. This standard depends on the jurisdiction and why the valuation is necessary. Knowing the value of the business helps both parties explore settlement options, buyouts, and financial choices. It also provides strong evidence if the case goes to trial.
When is a Business Valuation Needed in a Divorce?
A business valuation is often needed when a business is part of the marital estate. Determining the company’s value helps spouses, attorneys, and the court make informed decisions about property division and financial settlements. Common situations that require a business valuation include:
- One spouse owns the business: A valuation helps determine whether any part of the business is marital property.
- Both spouses own the business: The valuation provides a basis for dividing ownership or determining whether a buyout should occur.
- One spouse plans to keep the business: An independent valuation helps calculate a fair buyout amount.
- The business increased in value during the marriage: A valuation can help determine how much of that appreciation may be subject to division.
- The case proceeds to mediation or court: A professional valuation provides credible evidence to support negotiations or litigation.
If you are unsure whether a divorce business valuation is necessary, contact Peak. Schedule a free consultation today to get started.
How to Value a Business in a Divorce
It can be helpful to know how to value a business in a divorce before undergoing the process. Knowing what to expect helps business owners prepare and set expectations. When valuing a business for divorce, business appraisers rely on various valuation techniques. The following sections break down each step of the valuation process.
1. Gather Financial Information
The first step to value a business in a divorce is to gather financial and operational records. These documents provide the appraiser with a clear picture of the company’s health. Appraisers also use these documents to review how the business has grown during the marriage. This analysis provides clarity for future decisions and reveals its current market position.
Before a valuation, gather key documents from the last 3 to 5 years. Supply them to the business appraiser for assessment. Some important documents to gather include:
- Tax returns
- Financial statements
- Payroll
- Balance sheet
- Customer contracts
- Ownership documents
2. Apply Appropriate Valuation Approaches
After reviewing financial statements, business appraisers apply valuation approaches. These are techniques that help calculate the business’s worth. Most often, business appraisers apply more than one approach for a well-rounded appraisal. The three primary valuation approaches include:
- Market Approach: The market approach calculates a business’s value based on similar companies on the market. Business appraisers assess their selling prices to determine a realistic market value.
- Income Approach: This approach values a business based on its expected future earnings. Business appraisers project the company’s future income and discount it to a present value. This approach reflects the business’s ability to generate future economic benefits.
- Asset Approach: The asset approach calculates a business’s value by subtracting its liabilities from its assets. In a divorce, this technique is common for businesses with significant tangible assets. It is also useful when future earnings fail to reflect the company’s true value.
Peak Business Valuation has extensive experience in divorce business valuation. If you have any questions or are seeking expert insight, reach out to Peak. Begin today by scheduling your free consultation!
3. Assess Factors That Affect Business Value in a Divorce
When conducting a business valuation, appraisers review key factors affecting the company’s value. Both internal and external factors can have a significant influence on the company’s worth. Moreover, these key value drivers may affect the business’s future performance. Some common factors that business appraisers analyze include:
- Revenue and profitability
- Cash flow
- Industry outlook
- Assets and liabilities
- Customer concentration
- Owner dependence
- Growth potential
- Goodwill
- Market conditions
Business Goodwill in a Divorce
Goodwill can be an important factor when valuing a business in a divorce. Enterprise goodwill refers to the value created by the business itself. Examples include reputation, customer relationships, and established operations. Personal goodwill relates to an individual owner’s skills, reputation, or relationships. Some states consider enterprise goodwill divisible marital property, while excluding personal goodwill. Understanding the treatment of goodwill in your state is key when determining a business’s value. See Valuing Personal Goodwill vs Enterprise Goodwill to learn more.
Marital vs. Separate Property
When business appraisers value a business in a divorce, it is crucial to determine if the business interest is marital property, separate property, or a combination of both. Marital property generally includes assets acquired during the marriage. Separate property includes assets owned before the marriage or received individually, such as through an inheritance. The classification of a business interest can affect whether it is subject to division and how it factors into the divorce process.
Why Hire a Business Valuation Expert?
To value a business in a divorce, it is best to hire a business valuation expert. A valuation expert provides a credible, unbiased analysis to support informed decisions. Experts at Peak Business Valuation have experience with divorce valuations. We prepare business valuations that meet legal requirements. Our appraisers can also provide expert testimony when needed. In turn, both parties gain reliable information to move forward with the divorce process.
Summary
Valuing a business during a divorce can get complicated quickly. A professional business valuation helps establish a reliable market value. To do this, appraisers consider the company’s finances, assets, and other relevant factors. If you need to value a business in a divorce, a qualified appraiser can help you move forward with confidence.
Peak Business Valuation regularly values businesses for divorce. Our appraisers can help you determine your business’s fair market value. Schedule a free consultation today to get started with a divorce business valuation.
