On divorce, a business may be valued from an income approach or an appraisal approach. The three most common appraisal methods the Asset Based Approach, the Market Approach, and the Income Approach.
Divorce Business Valuation: Asset Based Approach
This a method of determining the total asset value of a business, and is sometimes used in a divorce. Asset Based Methods provide a base indication of value before any consideration of the earnings the tangible assets generate.
The “book value” of a company does not reflect market value. For the purposes of valuing during a divorce, a business’ balance sheet usually needs to be restated to reflect the market value of its assets and liabilities. The methods used for determining the value for a company’s assets include the Direct Market Comparison Method and the Cost Less Depreciation Method.
Divorce Business Valuation: Market Approach
This is a way of determining a value indication by comparing the business to similar investments that have been sold that is sometimes used in a divorce. It is a market-oriented concept that assumes the value of a thing tends to be determined by the cost of acquiring an equally desirable substitute.
The biggest obstacle to the Market Approach Method is finding information about companies that are similar to the business being valued for divorce purposes. Data about a public company data is often not really comparable to the reality of a small, privately held companies and, unfortunately, transactions in private firms are not generally available.
Divorce Business Valuation: Income Approach
This is an approach to determining a business’ worth by converting anticipated benefits into value. It involves estimating the amount of future income and converting the income into an estimate of value. The income approach looks at the business like a machine whose purpose is to produce money for its owner, who is going through a divorce.
Each of these approaches to making an appraisal has merit in the valuing process during a divorce. Within each approach, there are a variety of methods that may be used to determine value. The key is to find an appraisal professional with sufficient knowledge of each technique to make an informed decision about which methods will best reveal and represent the true value of the business for divorce purposes.
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