A major part of many divorces is deciding what happens to the marital estate. If you own a business, your soon-to-be ex-spouse may have an ownership interest in it. That is, after your divorce becomes final, your current husband or wife may end up with all or part of your business.
Before you can strategize for keeping or parting with your business, you must know how much it is worth. Three straightforward valuation methods are popular for divorce purposes, although each may reach dramatically different conclusions.
1. Market-based valuation
For conventional businesses, market-based valuation often provides a reliable estimate of a venture’s worth. This valuation method simply compares your business to recent comparable sales. Still, if you have a one-of-a-kind business model or operate in a remote area, market-based valuation may not be the right approach.
2. Asset-based valuation
For businesses with considerable assets, asset-based valuation is often the way to go. This method calculates the value of your venture by adding all assets and subtracting liabilities. If you go with this approach, do not forget to account for asset depreciation.
3. Income-based valuation
For lucrative businesses, income-based valuation may be the right approach. With income-based valuation, you determine the worth of your venture based on how much income it receives. It is typically permissible to use both current cash flow and income projections to determine income-based valuation.
There are some advantages and drawbacks to each valuation method. Note, though, whether you use income-based valuation or a different approach, you may need to rework your estimate during a lengthy divorce.