After years of marriage, it is likely that a couple has amassed numerous complex assets. From vacation properties and art collections to retirement accounts and digital assets, the divorcing couple will likely face significant challenges in reaching a compromise ending in an equitable split. If the couple owns a family business, however, valuation can cause an additional layer of complexity.
In a divorce, the couple will likely select one of three resolutions for their business:
- Sell the business and split the profits
- One partner buys the other out and continues to run the business independently
- The partners continue running the business together after divorce
In the first two options, the value of the business must be accurately determined. The process by which the economic value of a company is determined is called “business valuation.” There are numerous methods used to accomplish this, but five of the most common are the following:
- Asset valuation: The market value of a company’s tangible and intangible assets are tallied. These assets can include cash, equipment, real estate, patents, trademarks and customer relationships.
- Historical earnings valuation: This method looks at the financial history of the company to arrive at a value. Gross earnings, debt repayment and the capitalization of cash flow can all be significant factors in business valuation.
- Relative valuation: In this method, financial experts examine how much a comparable business would sell for in the current market.
- Future maintainable earnings valuation: By looking at data from the past three years (sales, expenses, profits and gross profits) experts can draw a parallel between future profitability and present value.
- Discount cash flow valuation: This method examines the business’s future net cash flows and discounts them to present day values.
It is wise to use two or more methods and compare the business valuation rather than simply relying on a single method by which to divide the company. It is important to work with an experienced legal professional who can guide you through this process while answering questions at every stage of the divorce process.
