Business valuation in divorce cases and the distribution of marital property in many divorces can be complicated and the source of much frustration, anger, and contention for both parties. The process is even more complicated if the divorcing couple’s community property includes interest in a business. The business interest will often be the most valuable part of the divorcing couple’s community property. In addition, the business interest may generate profits and salaries for one or both of the divorcing spouses. The business interest is a part of the community property and, as such, must be divided as part of the divorce. In order to properly divide the community property, the business’s value must be determined.
The valuation of a business is not a simple tax, and the use of a professional business appraiser is almost always required. There are several methods to determine business value, and the appraiser will typically select the most appropriate valuation method according to the type of business in question and the information available. Valuation methods fall into three categories: asset approach, income approach and market approach.
The asset approach determines the business’ value by using one or more methods based on the value of the assets minus any liabilities. The asset approach initially seems very simple, however, there are a number of complicating factors. For example, the value of property and equipment can, at times, be difficult to ascertain because their value is not always the equivalent of book value. In addition, assets like goodwill and intellectual property are notoriously difficult to value, because they are intangible. The asset approach is typically relied upon when the business is an investment or holding company, or with very small businesses or professional practices where there is little or no goodwill.
The income approach determines the value of the business using one or more methods that convert anticipated economic benefits into a present single amount. The income approach is the most widely used method for valuing small, privately held businesses. In reaching a business valuation, the expert will collect and review the business’ historical financial data, in an attempt to estimate future business earnings. The valuation expert will attempt to determine the future income, along with the risk that the projected income will actually be received.
The market approach determines the value of the business by comparing the business to similar businesses that have been sold. The market approach is very similar to the method used by real estate agents when valuing homes. The difficulty with the market approach lies in finding data about other comparable business sales in the same geographic area. In fact, most businesses being valued are small, privately held businesses, while most transactional information available relates to large publicly held companies, with significant differences in size, sales, profits and geographic location.