When income that is generated during a marriage comes from a business owned by one or both parties, there should be a business evaluation conducted as part of the process of determining the overall value of the estate. There are several methods for valuing a business. Which valuation approach works best for purposes of family law depends on the nature of the business at issue.
The Market Approach
This is the method generally used for selling a home. For example, people go to Zillow and ask, “What is the value of my home?” The response is based on the price other similar homes in the same area that have recently sold.
This method may work well if the business is a gas station, convenience store, or laundromat where businesses often change hands. This method does not work well for other types of businesses, like professional practices, manufacturing companies, or a family-owned business. These businesses stay in business for years, maybe decades, and there are no other sales of similar businesses that can be compared.
The Asset Approach
The asset approach may work for some types of businesses. It is almost self-defined and values the business by adding up all the assets. This includes the real estate, equipment, stocks, cash on hand, and even the goodwill of the business. Then, liabilities are subtracted and that is what the business is worth.
The Income Approach
The income approach looks at the business’s financial past to project future income. There are different ways to do this. One is to just ask the business owner. The owner is often the best source for determining the business value. They talk to their competitors and know what other similar businesses are selling for.
This method also uses tax returns and other financial statements to see what income is being generated. It also shows whether a business is gaining or losing value.
How Long Does the Valuation Process Take?
The professional placing a value on the business also uses certain “rules of thumb” that apply to valuation. There are some rules that do not apply across the board for all businesses, and other specific rules when valuing specific industries.
This process takes about four weeks, or 30 days to get a final finished product. This includes the professional obtaining all the relevant documents, determining which process works for the certain business involved, and drafting a final report.
From the Blog
Business Valuation and Divorce in these Uncertain Times
Divorce and a business can make an already complicated process even more complex. When there is a business involved there must be a value placed on that business. If the business was owned by one party prior to the marriage the value of that separate property interest must also be considered. Even in the best of times, this is a contentious issue, and a divorcing couple may have different … [Read More...]
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