The different methods of business valuation

At the end of a long-term marriage, couples will likely have to work through the division of numerous complex assets and debts. From homes and vehicles to retirement plans and bank accounts, it is not uncommon for couples to amass several assets and liabilities. One that typically requires a lengthy process to reach a compromise is the division of a family business.

Part of the difficulty in reaching a compromise regarding business division lies in the first step of the process itself – determining the value of the business. Generally, there are five agreed-upon methods of business valuation.

  • Many people consider asset valuation to be the primary method. By examining both the intangible and tangible assets owned by the business, a value can be reached. These assets can include on-hand cash, property, equipment and inventory. Additionally, the value of any patents or trademarks can be used to reach a conclusion.
  • Another strategy focuses on historical earnings and the repayment of debt. By researching the company’s cash flow and income-to-debt ratio from a historical perspective, experts can arrive at a proper business valuation.
  • The relative valuation method will look at similar organizations. How much would these organizations sell for? By understanding the value of comparative businesses, you can understand the value of your own business.
  • Carefully examining the business’s future profitability, it is possible to arrive at a valuation based on future maintainable earnings. By using sales figures, expenses and profits, it might be possible to predict future value.
  • Looking at the organization’s future earnings can also be used in the discount cash flow valuation Here, the financial experts will examine potential future cash flow and then discount it to present-day values.

Whether using one method or a combination of several, a divorcing couple can make the decision to sell the business or have one spouse buy the other out. You should ask these questions as soon as possible in the divorce process to ensure you arrive at the best compromise possible.

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