3 potential problems with market-based business valuation

| May 25, 2021 | Uncategorized

If you are contemplating ending your marriage, you may already know you likely must divide the marital estate. In the commonwealth, Massachusetts law instructs judges to divide marital assets equitably. Consequently, if your business is a marital asset, you may need to address its ownership during your divorce.

Before negotiating ownership of your business venture, you should know how much it is worth. If you decide to use the market-based valuation approach, which estimates your company’s value by considering comparable business sales, you should be aware of three potential problems.

1. Finding a comparable business

While market-based valuation may give you a ballpark estimate of your company’s value without requiring an in-depth review of its financials, it does not do you much good if you cannot find a comparable business. If you have a unique business model or operate in a remote area, you may simply not have sufficient data to reach a reliable figure.

2. Identifying recent sales

The market may fluctuate wildly due to economic forces, customer interest and other factors. Even if you manage to find recent sales data for a comparable business, your valuation may not age well. That is, if your divorce lasts for months or longer, your market-based valuation may no longer be valid.

3. Accounting for your business’s value

Finally, your business may be more or less valuable than comparable businesses that have sold recently. Unless you understand the finer details of the comparable business sale, you may not come up with a realistic estimate of your company’s worth.

While market-based valuation has some pitfalls, it also has many advantages. Therefore, you may want to use market-based valuation early in your divorce process to give you a general idea of your company’s value.