When a marital split is on the horizon, you know that putting a precise value on the family business is going to be crucial to a fair outcome. However, you may not know where to start.
Guessing is a bad idea — even if you and your spouse can agree on a figure. A wrong guess can permanently put one of you at a major financial disadvantage. You’re most likely going to need some professional help from a business valuator or accountant to come up with an accurate valuation. Before the process starts, however, you need to decide which method of valuation you and your spouse will use.
The three most common methods of business valuation are:
- Asset-based valuation: This is typically easier with a corporate entity than with a small business run by a sole proprietor or partners. It looks primarily at the assets (inventory, real estate, contracts and other items) the business holds as a way of assessing its worth.
- Earnings valuation: Some businesses are light on assets because their real value is in their potential earnings. Instead of judging the company value by its possessions, the appraiser tries to predict how much the company will continue to earn in the future.
- Market valuation: This way of valuing a business essentially asks the question, “If it were sold today, what would the business be worth?”
There are, naturally, pros and cons to each approach. A market valuation, for example, may provide you some certain figures for today. However, you lose the potential of increased value in the future.
Business valuation can be a difficult concept to approach, especially when you and your spouse need to come to an agreement about how to proceed before you can move on with your lives. Find out more about your legal options today.