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3 common methods of business valuation

On Behalf of | May 12, 2021 | Property Division |

A high asset divorce typically includes numerous complex assets that must be divided. Complex assets can include vacation properties, deferred compensation, investments and a family business. Before an equitable distribution can be reached, these assets must be carefully inventoried and a proper value must be determined.

When determining the value of a business, the divorcing couple can elect to pursue numerous methods. Three of the most common business valuation approaches are:

  • Asset-based approach: In this method of business valuation, the assets of the company are thoroughly inventoried minus the company’s liabilities. The assets can include all material, property, buildings, trade secrets, stock and machinery.
  • Earnings approach: The earning value approach is rooted in the notion that the value of a business is largely based on its ability produce revenue in the future. There are numerous methods that can be used in the earning value approach, but the most common one used is capitalizing past earnings.
  • Market value approach: In this approach, comparable companies that have recently been sold are examined. Businesses of similar size and scope will be reviewed to fully understand what the divorcing couple’s company might sell for in the same market.

While these are three of the most common methods of business valuation, there are several others to choose from. Most often, the divorcing couple will use multiple methods and compare the results to gain a clear picture of the worth of an organization. Once the value has been determined, the couple can then either sell the business and split the profits or one spouse can buy out the other and continue to run the organization independently.

When divorce becomes a reality, it is wise to seek the guidance of an experienced legal professional as soon as possible.