As a small business owner, your business undoubtedly means a great deal to you. You are emotionally attached to your company because of the sacrifices you made and hard work you put into it year after year. You feel that it is a part of you and has considerable worth.
If you find yourself facing divorce, knowing the fair market value of your company is crucial in determining a fair property division and to keep you from paying more for your business than it is actually worth. When valuing a business, your sentimental attachment should not equate to dollars and cents. During a divorce and equitable distribution case, there are three common ways to value your business.
The simplest way to value a company compares assets to debts. Depending on the type of business your company carries out, the amount and type of assets you have can vary. To obtain a valuation, you need to determine the value of the assets. Once the value of the assets is determined, subtract your business debts. That’s it. Assets-based valuation uses only the most basic information and often results in the lowest valuation of your business when compared to other methods.
Discounted cash flow
Another way to determine the value of a business focuses on the future cash flow stream. For this method, the valuator examines the estimated profit your company may make in future years and the reliability of those estimates. Often, a discount rate is applied that allows for the inclusion of the time value of money and also relates to how risky a potential buyer would consider your company. This valuation method is often considered the most accurate, but it generally requires the employment of an expert and can be very expensive depending on the complexity of your business.
A third way to value a company compares the subject company to similar companies in the same line of business – much like a real estate appraiser may use “comps” to determine the value of a home. However, many consider the results of this method questionable, especially if your business offers a unique product or service. If a comparison valuation is used, be sure the other companies used for comparison truly are comparable to your own company in product, size, location, etc.
Business valuation and divorce
You may lose a portion of your business or have to pay your spouse for the marital interest of your business in a divorce. The method you use to determine the fair market value of your business will impact the overall division of property in your case. Discuss your options with a Virginia attorney dedicated to family law who can help you with this complicated endeavor.