During your divorce, you probably realize you must give some marital assets to your spouse. If your small business is part of the marital estate, your partner probably has an ownership interest in it.
While you likely have some options for dealing with your small business during and after your divorce, your venture’s value is certainly relevant. Typically, there are three ways to value a small business for divorce purposes.
Market-based valuation
For businesses that are easy to sell, market-based valuation often makes sense. With this type of valuation, you determine how much the venture would likely bring on the open market.
To come up with a market-based valuation, you may need to research the purchase price of comparable businesses. Nevertheless, if you have a unique business model or a venture that is difficult to sell, market-based valuation may not do you much good.
Income-based valuation
Arguably, the easiest way to value a small business is to determine how much the venture makes in any given year. With this approach, you simply subtract business expenses from gross revenue. Income-based valuation is not without its hiccups, though.
If your small business operates in the red, income-based valuation is not likely to give you a reliable assessment of its worth. The same is true if your company is on the verge of explosive sales or growth.
Asset-based valuation
The last common valuation approach, asset-based valuation, determines the worth of a business by calculating the value of all assets the entity owns, minus depreciation. If your small business has substantial equipment, inventory or accounts receivable, this approach may be the right one.
On the other hand, if your organization has few assets, asset-based valuation may not paint a realistic picture of the venture’s value. Unfortunately, each valuation method may yield wildly different results. Therefore, you may need to work with an independent appraiser to better advocate for your small business ownership interests.
