If you are planning to end your marriage, you probably already know you must divide marital assets. The business you and your spouse own may be one of the more valuable parts of your marital estate. While there are options for dealing with business ventures during divorce, your first step is probably to determine how much the business is worth.
The method you use to value your business may make a tremendous difference in your final figure. Consequently, it may be in your financial interests to explore all valuation methods to determine which one is most favorable to you. For divorce purposes, three valuation methods are common.
1. Asset-based valuation
Asset-based valuation determines the worth of your business by adding up all its assets and accounting for depreciation. If your business has significant inventory, equipment, intellectual property or other assets, asset-based valuation may put a high value on the venture.
2. Income-based valuation
With income-based valuation, you determine the value of your business by calculating current and future cash flow. If you go this route, you review historical revenue and make normalizing adjustments to predict your business’s ongoing revenue stream. Of course, if you have a new business that still operates in the red, income-based valuation may result in a low estimate of your venture’s worth.
3. Market-based valuation
Market-based valuation estimates what your venture would likely bring on the open market. If there are recent comparable business sales in your industry and area, you may be able to calculate the value of your venture without looking at in-house financial records. Still, if you have a one-of-a-kind business model or operate in a remote area, market-based valuation may not produce a reliable figure.
Ultimately, you and your soon-to-be ex-spouse may negotiate which valuation method is appropriate for your divorce. Your husband or wife may also seek an independent valuation. Nevertheless, determining the value of your business is likely to ensure you receive an equitable share of the marital estate.