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Divorce is already a rather complex experience for couples to go through, however tacking on that of the value of a business can make it that much more difficult to navigate. Accurately calculating a company’s worth can require a myriad of financial records, tax returns, bookkeeping files, inventory records, assets, cash flow, debts, etc.
As divorcing couples navigate the division of assets, adding even a minority stake in a business can add a multitude of layers to an already lengthy and complicated divorce process. To determine the value of a business, there are several different methodologies, as well as a few general principles for quickly producing an estimate.
Business Valuation Methods
When determining the value of a business there are three distinct business valuation methods to consider during the divorce process. These are:
- Income Approach: utilizes a business’ future profits and/or cash flow to determine a current value.
- Market Approach: values the business based on the sale of comparable business within the same geographic region and time of sale.
- Asset Approach: this method is exclusively used when the first two methods fail to generate a value. It calculates the value of valuable assets such as real estate, unsold inventory, or other business assets that exist at the time of divorce.
The Income Approach To Evaluating Your Company’s Value
While the most complex method to determine the value of a business in a divorce, it is the most favored—and for good reason. Within the Income approach are two distinct methodologies: the capitalization of earnings method, and the discounted cash flow method. Both methods utilize the company’s net profits or cash flow to estimate its future earnings.
The capitalization of earnings method determines a company’s value by finding the net present value (NPV) of future profits and dividing them by the capitalization rate.
The discounted cash flow method utilizes past performance projections to determine its value today. When evaluating a business, you’ll add in “discounts”, or modifications of value based on the amount of debt and equity held by the company.
For either of these methods to work, you’ll have to calculate cash flow. To do so, you’ll likely have to deduct your salary from the company’s overall cash flow, which then leaves the “profit” for the final calculation of the business’ future value.
The Market Approach To Evaluation Your Company’s Value
The market approach is a valuation technique that works akin to a real estate appraisal. To work, valuators will analyze your business, then compare it against very similar businesses in your regional market that have recently sold as well. This method is particularly useful when evaluating franchised businesses, as there’s a very large volume of these businesses to compare against. It may be easy enough to find similar businesses to compare things such as gross sales against, however more niche, unique businesses will still have to utilize the income approach to calculate its cash flow and income.
The Asset Approach To Evaluation Your Company’s Value
The asset approach is utilized when recognizing the fair market value of a company’s assets and their liabilities. While the aforementioned methods are typically favored over the asset approach, it certainly does have its place. The asset approach is commonly used when a valuator is unable to generate a value using the income approach. This usually occurs when a company doesn’t generate enough income to capitalize into a future value, the valuator is unable to establish comparable sales through the market approach, or the valuator’s assets exceed the value generated by the income or market approach.
Count On Yaffa To Assist During The Business Valuation Process
While our attorneys don’t perform the business valuation process directly, we have a deep understanding of the process to better assist our clients in securing critical information necessary to determine an accurate valuation. We’ll do everything in our power to help you navigate the complexities of divorce, including the business valuation process. Contact us today for a free consultation and take the first steps towards the rest of your life.
