It is not uncommon for a married couple to have worked for years or decades to grow a strong business together. Unfortunately, when divorce becomes a reality, the couple must decide what will happen to the organization in the future. The first step in this process is the business valuation and there are several methods the couple can follow.
While there are numerous subtle distinctions that can be tailored to the unique business situation, there are five common methods of completing a business valuation, including:
- Asset valuation method: In this method, the chosen financial experts examine the total amount of the company’s assets – tangible and intangible – to determine the worth of the business. These assets can include real estate, buildings, equipment, inventory, patents and customer relationships.
- Historical earnings valuation method: One method of business valuation looks at the history of income, debt repayment and capitalization of cash flow to assess the value of the organization.
- Relative valuation method: Similar in scope to residential real estate “comps,” the relative valuation method determines how much a similar business would sell for. This valuation helps the couple understand what a reasonable market asking price would be.
- Future maintainable earnings valuation method: In a stable market, experts examine the organization’s sales, expenses and profits from the past three years to determine the trend that will likely persist into the future.
- Discount cash flow valuation method: Conversely, if the stability of the market is in question, financial experts look at the organization’s future net cash flows and discounts them to current, present day values.
In general, the divorcing couple will often examine multiple methods of business valuation to thoroughly understand the true value of the organization and determine the best way to proceed. Based on this information, the couple might decide to sell the business and split the profit, one spouse buys out the other or they decide to run the business together. Having the best information in hand allows couples to be confident in their property division decisions.
