3 common ways to value a business for divorce purposes

On Behalf of | Jul 30, 2020 | Family Law

If you are planning to end your marriage, you may have some concern about your financial future. Fortunately, Minnesota law generally entitles you to a just and equitable share of everything you and your soon-to-be ex-spouse own.

Your business may be part of the marital estate. If so, your spouse likely has some ownership interest in it. During your divorce, you probably have some options for addressing your business venture. Before you explore any of these, though, you must know how much your business is worth.

Three valuation methods are common for divorce purposes.

1. Income valuation

Arguably, the easiest way to estimate the worth of a business is to determine its future income potential. To do this, you consider past business income and future income projections.

Accordingly, if you have a good idea about your company’s cash flow and profits, determining its value may not be too difficult.

2. Market valuation

For business ventures that are not yet profitable, market valuation may be a better approach.

With this type of business valuation, you consider how much your venture would likely fetch on the open market. This often requires looking at comparable business sales.

Of course, it can be challenging to find comparable businesses, especially if your company follows a unique business model.

3. Asset valuation

Some business ventures own many assets. That is, companies often have equipment, inventory, accounts receivable and other valuable property.

To proceed with asset valuation, you subtract how much your business owes from how much it owns. Note, though, with asset valuation, you must carefully consider asset depreciation.

Whether you opt for income, market or asset valuation, you may receive vastly different results. If there is some dispute about how much your business venture is worth, your spouse may seek his or her own valuation. Regardless, understanding how to value your business is critical for receiving your fair share of it.