Valuing a Business for Divorce
Divorce can be a long, painful process that puts strain on every aspect of your life. Divorce is also rarely anticipated or expected in long-term plans. Divorce proceedings can be even more complicated if one or more parties own a business. If you or your spouse owns a business and are in a divorce, getting a business valuation for divorce will help simplify the process. In this article we explain more about valuing a business for divorce and why it is important to your case.
Peak Business Valuation, a business appraiser, frequently values businesses for divorce cases. With a divorce business valuation from Peak, you can simplify your divorce and understand its effects on your business. Reach out today to connect with our team of valuation professionals and schedule a free consultation.
What is a Business Valuation for Divorce
A business valuation simply put is an analysis of the financial state of a business. Valuation professionals determine the value of a business by using financial statements and various valuation methods. The valuation report will contain a summary of the strengths, weaknesses, opportunities, and risks of the business as well as the market value. This helps you understand the value of your business as well as future growth potential.
Why a Business Valuation is Important in Divorce Cases
Valuing a business for divorce can be different than a standard business valuation. Many divorce cases include a division of assets which can include the business. A business valuation for divorce can assist in that process and help you understand the market value of a business. The valuation may also include a valuation of the assets owned by the business. Asset valuations can be helpful for a fair division of assets and fairly compensating both parties.
In many divorce cases, the parties attempt to negotiate the value of their assets and contributions. This can add time, cost, and headache to an already painfully long and expensive process. Having a commonly understood value of a business reduces complications. A business valuation for divorce also increases transparency between both parties, therefore smoothing the negotiation process. See The Importance of a Business Valuation for Divorce to learn more.
Effects of Divorce on a Business
Businesses are frequently the most valuable asset owned in a marriage. Divorce can have adverse effects on a business, especially if both parties actively contribute to the business. Valuing a business for divorce will assess each individual’s contributions and the financial impacts the divorce may have on a business.
Discounts in a Business Valuation for Divorce
Professional business appraisers may apply discounts to a business when valuing a business for divorce. Discounts applied in a valuation will discount the worth of a business according to the change in value drivers stemming from the divorce. Changing value drivers are important to know when considering the value of a business in a divorce. Common discounts in divorce valuations include minority discounts, marketability discounts, and key personnel discounts.
How to Value a Business for Divorce
Business appraisers use a combination of methods when valuing a business for divorce. The most common are the income approach and the market approach. The income approach uses the business’s income or future cash flow projections to determine the business’s value. The income approach can also account for risk factors that may change future income in a business. The market approach is similar to a real estate appraisal. Business valuators analyze the sale of other similar businesses and use valuation multiples to determine the value of a business. When performing a divorce business valuation, the professional appraiser will typically use a combination of valuation methods.
Key Factors in Valuing a Business for Divorce
Business appraisers consider many things when valuing a business for divorce. They analyze financial documents, value drivers, risks, discounts, and more that affect the value of a business. Valuing a business for divorce is difficult and business appraisers must take everything into account. Because of this, valuation professionals will also assess several key factors in a business that change the future value of the business. We explain some of these key factors below.
Revenue & Profitability:
One of the most important parts of a business valuation is an analysis of the revenue of the business. Essentially, business appraisers analyze cash flow, revenue, and profitability. It is possible that a business can be very busy and have many clients but not be making money. Whereas, businesses that have higher profit margins tend to have higher valuations. Overall, a business valuation includes a thorough financial analysis of the business.
Growth Potential:
Another critical part of a business valuation is identifying opportunities in the business. Businesses that have shown consistent growth and have increased projected future growth are much more valuable. During a business valuation for divorce, business appraisers will analyze key value drivers and opportunities for growth.
Assets & Liabilities:
The value of a business can vary greatly depending on the level of assets and liabilities it has. Businesses that have higher asset-to-liability ratios are worth more. Additionally, divorce can alter the level and value of the assets and liabilities that a business has. When valuing a business for divorce, assets and liabilities are a key factor in the valuation.
Ownership Interests:
As previously mentioned, divorce can alter the ownership interests to the point where discounts are even applied in some cases. In general, businesses that have low ownership dependence have a higher valuation than owner-dependent businesses. In divorce, the splitting of owners can adversely affect the worth of a business. Part of a business valuation for divorce will analyze the changing levels of ownership and its effect on the business.
Peak Business Valuation can help you understand the value drivers and key factors in valuing your business for divorce. Our team of valuation professionals has years of experience working with business owners involved in divorce litigation. Schedule a free consultation with Peak today to learn more about valuing a business for divorce.
Expert Witnesses in Divorce Litigation
Part of the importance of a business valuation for divorce is using the valuation in court. Because valuing a business for divorce can be complex, judges usually require a professional business valuation when considering the value of a business in court. During the legal proceedings, business appraisers may also be needed to testify as expert witnesses to explain their valuation. This is because understanding all the different ways that divorce changes the value of a business is complicated.
To serve as an expert witness, individuals must have the proper credentials and certifications. Peak Business Valuation has a team of certified experts who can serve as expert witnesses in legal disputes. With this ability, appraisers can offer a comprehensive business valuation that you can use in each step of the divorce process.
Conclusion
Divorce can be complicated and strenuous. Businesses involved in divorce cases also suffer the consequences of divorce. Valuing a business for divorce assesses all the different ways that divorce changes the value of a business. Understanding these factors can help you mitigate the negative effects of divorce and maximize your business’s value.
Peak Business Valuation values many businesses nationwide for divorce every year. Our team of valuation experts can help you understand the current and future value of your business. We are also qualified to serve as expert witnesses in court to explain a litigation business valuation. To get started on a business valuation for divorce, schedule a free consultation with Peak below.
