What are the Most Common Small Business Valuation Methods?

 Posted on October 19, 2021 in Family Businesses

Once a divorce process begins, you have endless things to think about and take care of. For small business owners, the list is even longer. You may worry that your divorce will permanently affect the success of your business, leaving you without a way to provide for yourself or your children. 

Understanding how businesses are valued and treated in a Texas divorce is an important first step in making wise decisions during the divorce process. While this blog gives a brief overview of business valuation methods, your attorney is the most qualified source of answers to your questions. 

What is My Business’s Market Value? 

Using the market valuation method means looking around at the value of recently sold similar businesses with a willing seller and a willing buyer. Requiring both the buyer and seller to be willing excludes any businesses whose prices may have been artificially lowered by an unwilling seller in a tight situation. 

Because the market value of a business in a divorce is hypothetical - the business is not actually being negotiated for sale - it can be difficult to determine. Although the market value method is often the most preferred, if it is not useful or applicable, other methods become necessary. 

What is the Advantage of Using the Owner Valuation Method?

Determining a business’s “value to the owner” is often used when the market valuation is impractical, such as when a business is primarily owned by parents and their children own minority shares. This can apply to divorcing spouses when one spouse owns a portion of a business that has become a marital asset and must be divided. 

The value to the owner method considers the benefits of the business to the owner, even when there is no hypothetical third-party purchaser. This includes any income, savings, perks, and any other benefits from the business that are of tangible value. 

What are Other Valuation Methods? 

There are many possible business valuation methods. The “book value” method takes the sum of a business’s assets and debts to determine its value on paper. Other methods include the adjusted net asset method, excess earning method, capitalization of earning method, and other market-based methods. An expert with experience in valuing businesses can help you decide which method is best. 

Who Determines My Business’s Value, and What Will They Do? 

Financial experts who commonly are used to determine a business’s value include Certified Business Appraisers, Accredited Senior Appraisers, Certified Valuation Analysts, and professionals who are Accredited in Business Valuation. These experts have different levels of experience and areas of specialty, and your attorney can help you decide which is likely to be the most helpful. 

A business valuation expert will collect documents, receipts, tax records, insurance policies, and other evidence to determine the value of your business and prove their opinion in court. The expert can testify in court about the different factors they used and judges and the opposing counsel can ask questions. 

Speak with an Austin, Texas Property Division Lawyer

The prospect of dividing or even selling your business in a divorce can be heartbreaking. At Powers and Kerr, PLLC, we understand how important it is to keep your business thriving, even during divorce. We will work tirelessly to represent your interests and help you understand your options under Texas law. Contact us today to schedule a confidential consultation with one of our experienced Travis County divorce attorneys. Call us at 512-610-6199. 

Source:

https://statutes.capitol.texas.gov/Docs/FA/htm/FA.7.htm