Valuating a business is one of the most complicated processes during a divorce. According to U.S. Small Business Administration, small businesses make up 99.9 percent of all US businesses. The amount of wealth generated is staggering, and if you are in the middle of a divorce, you probably worry about losing your share.
For business owners going through a high-asset divorce, you need to determine the best valuation method that you and your spouse can agree on. See below for the three most common practices.
1. Market valuation
If you have plans to sell your business, the market approach to valuation is a good option. However, a lot of information is necessary to create an accurate picture of the business’s worth. The valuator needs to compare similar companies in the same region and estimate future profitability.
2. Income valuation
Although the most complex, the income approach is the most common valuation method. Valuators must deduct liabilities from gross income to estimate profit. The business’s present value is directly determined by its future earning potential.
3. Asset valuation
When a business is not profitable but has high-value assets worth more than the company’s debts, the asset approach is most appropriate. Valuators may also default to the asset approach if they cannot create an accurate income or market valuation. The asset method is not standard in divorce cases.
Working with business valuation professionals is essential for business owners and their spouses going through a divorce. Even if you want the divorce to end quickly, do not rush the valuation process, as it can affect your financial health for the rest of your life.