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The challenge of proper business valuation in divorce

On Behalf of | Jun 22, 2020 | Firm News |

Couples who have focused on building a financial future while married might have amassed stocks, investments, retirement accounts and income properties. Additionally, it is not uncommon for a married couple to either create a business together or cooperate to ensure a business’s growth and prosperity. When divorce becomes a reality, unfortunately, the family business must be accurately valued before it can be divided between the divorcing couple.

How is the business valued?

There are numerous methods for calculating the value of a business. Two of the most common methods include:

  • Book value method: This is largely a calculation based on the business’s books. In broader strokes, the book value method examines the original cost of the asset minus the depreciation of the asset plus any increase due to market fluctuations.
  • Market approach of valuation: Essentially, the market approach is just that. The valuation is based on what an outside buyer would pay for the business.

Other methods can include liquidation value method, earnings multiplier and the times revenue method.

The date of the valuation is critical

While it might not seem at first that the date of the business valuation is that crucial, it is a quite significant point in the overall calculation. Depending on numerous complex factors, it is not uncommon for a divorce to take months or years to reach a conclusion. If the business valuation is completed at the beginning of the process, the business might hold a different value years later.

It is important to work with an experienced family law attorney who can answer your questions and provide the legal guidance you need.