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How is family business valued during divorce?

On Behalf of | Aug 26, 2021 | Business Divorce

When a family business needs to be divided, there are several different options for how the business may be divided and most options will rely on a business valuation. Divorcing couples who share a family business should be familiar with the different ways a business may be valued during divorce. So, how a business may be valued during divorce

Asset approach

The asset valuation approach calculates assets, both tangible and intangible, and subtracts liabilities from that to determine the value of the business. Some assets can be easier to value, such as vehicles or computers, but others, such as inventory or office equipment, can be more challenging to value.

Income approach

The income approach focuses on the revenue of the business, utilizing the past performance of the business to predict what the future income of the business might be. This approach focuses on projected cash flow and profits. Income is typically defined as the value of the proceeds from all of the goods and services the business has sold. The income valuation method is the method most commonly used.

Market approach

The market approach to valuation assesses and evaluates other businesses of a similar size that have recently been sold. In some instances, there may not be any similar businesses that have been recently sold. In many situations, it can be difficult to find comparable businesses to conduct the market valuation approach. For that reason, this is the least common valuation method used and the divorcing spouses may need to consider the other two approaches for business valuation purposes.

Business valuation is an important step when dividing a family-run business during divorce. Once the business has been properly valued, the couple can decide on the best method of dividing the business as part of their overall property division settlement agreement.