How Is the Value of a Business Determined During a High-Asset Divorce?

 Posted on November 23, 2020 in Family Businesses

Business interests are often an important consideration in a high net worth divorce. A family business can represent a significant source of income, and it is likely to be one of the most valuable assets owned by a married couple. Since business interests must be included along with other assets when dividing marital property between spouses, determining the value of a business is crucial for making sure all assets can be allocated fairly. In these cases, spouses should be sure to understand the methods that may be used when performing a business valuation.

Three Methods of Business Valuation

There are multiple different approaches that can be taken when determining a business’s value. Typically, they fall into the following categories:

• Asset-based valuation - The simplest method of business valuation involves a calculation of the total value of the assets owned by a business. The business’s debts or liabilities are then subtracted from this total to determine the value of the company. While this approach can determine the cash value of the tangible assets owned by a business, it may not take other factors into account, such as the business’s goodwill in the community, its relationship with its customer base, and the value that an owner brings to the organization.
• Income-based valuation - This approach can be used to obtain an idea of the income that a business will likely generate in the future and its potential growth over the next several years. Methods such as discounted cash flow can look at the business’s past earnings and projected future earnings, while also considering how these earnings may increase if they are reinvested in the business to promote growth. This approach will often provide a better understanding of how a business will increase in value, ensuring that spouses understand the benefits of retaining ownership of business interests.
• Market value - Another method that may be used to determine a business’s value will look at recent sales of other similar businesses in the same geographic area. This can provide an idea of how much the spouses would be able to receive if they sold the company during their divorce. However, this method is not always completely accurate, since factors that affected the selling price of other businesses, such as poor management, may not apply to the business owned by the divorcing spouses.

In many cases, a combination of these approaches is used to place a monetary value on a business. Once spouses have a full understanding of the value of this and other assets, they can determine how to divide their marital property fairly. In some cases, one spouse may retain full ownership of a business, while the other receives other assets of a similar monetary value. Spouses may also decide to sell a business and divide the profits, or they may choose to continue to co-own a business after they complete their divorce.

Contact Our Austin Business Valuation Attorney

To ensure that business interests and other marital assets are valued properly in your divorce, you will want to work with an attorney who is experienced in handling cases involving complex financial issues. At Powers and Kerr, PLLC, our Texas high net worth divorce lawyers can provide the legal help you need, and we will advocate for your financial interests throughout your divorce case. Contact us today at 512-610-6199 to learn how we can help you complete your divorce successfully.

Sources:

https://www.investopedia.com/terms/b/business-valuation.asp

https://www.axial.net/forum/3-valuation-methods-use/