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Small business valuation: A key way to ensure you get your fair share in divorce

On Behalf of | Jun 5, 2024 | Divorce, Family Law |

When a marriage ends, dividing the couple’s property can be a challenge. Even more is at stake if either spouse owns a small business. When business owners divorce, assessing the value of their company is a key step toward fair property division.

Both business owners and their spouses need to be familiar with the different methods of business valuation  and know the value of an accurate assessment.

An asset-based approach considers what your business owns.

This method evaluates a business based on its assets. It involves calculating the business’s total assets and subtracting any liabilities. This method is often straightforward. It can also provide a clear picture of asset-heavy businesses or those undergoing liquidation.

However, it might not reflect the true value of businesses. For example, asset-based valuation may miss the value of intangible assets like brand recognition.

A market-based approach uses the sale of other companies to estimate a price for your company.

This approach values a business by comparing it to the sale price of other businesses. It is effective when there are enough comparable sales to establish a clear market value. However, it can be problematic for businesses with few similar companies in the area.

An income-based approach projects your future earnings.

One of the most common methods, this approach estimates a business’s value based on its future earnings potential. First, you calculate your company’s expected income. Then, you subtract future expenses.

This approach is best suited for businesses that have consistent profits. However, an income-based approach is only as good as the information used to make the estimate. Without accurate financial forecasting and an understanding of economic conditions, this approach may not be accurate.

Regardless of the method chosen, proper valuation can be a important step toward a fair division of your property in divorce. A thorough and equitable valuation helps guarantee that both parties receive their fair share of the marital estate.