Going through a divorce is difficult, but the spouses also need to do some time-intensive actions as part of the process. One of these for business owners is valuing a business if it is marital property. It enables the owner or a business valuation expert to come up with a dollar amount.
It is also common for couples and their attorneys in high asset divorce to each value the business – these numbers rarely are the same. These experts will then testify in court about how they arrived at their number.
What to look at
There are different ways to value a business, but some common factors include:
- The balance sheet: This includes a comprehensive list of all tangible property (equipment, bank accounts, property) and intangible property (reputation, trademarks, customer base). They will also need to look at liabilities like loans, debt, payroll, other financial obligations).
- Net profit: This is generally the amount of income for goods, services and investments minus the cost (payroll, taxes, expenses) of operating the business.
Book value versus market value
The two main approaches to valuing a business are book value and market value.
- Book value: This is based on the balance sheet of assets minus debts, depreciation of equipment and other things. It also considers market fluctuations.
- Market value: This uses the earning capacity of a business and not its actual earnings. It also reflects the price another business would pay to buy the company.
An accurate analysis should reflect about five years of numbers. This long view helps determine upward and downward trends and the normal cycle of economic peaks and valleys that the average business sees over time – for example, there are busy times when the income is higher.
The valuation should be current
While the valuation looks back five years, it is still essential to have the most up-to-date information. So, it is best to conduct a business valuation during the time of the divorce. Those with questions should speak with their divorce attorney.