6 Methods For Valuing A Business In A Divorce

On Behalf of | Apr 15, 2024 | Divorce

During divorce, you might be entitled to a fair share of the marital assets, which could include a business. In this case, the business value must be determined to better ensure equitable distribution of assets between the spouses.

Business valuation is a process that can involve various methods and approaches to determine the worth of the business. When valuing a business in divorce, here are several methods that you can consider.

1. Times revenue method

This method involves multiplying the business’s annual revenue by a certain factor to estimate its value. The multiplier used typically depends on industry standards, the business’s growth potential and other relevant factors. For example, a business in a rapidly growing industry might have a higher multiplier than one in a stable or declining market.

2. Market capitalization

Using this method, the business’s value is determined by multiplying its outstanding shares by its current market price per share. This approach is commonly used for publicly traded companies where market prices are readily available. However, for privately held businesses, determining an accurate market value can be more challenging due to the lack of publicly available stock prices.

3. Discounted cash flow method (DCF)

Here, projections of future cash flows generated by the business are discounted back to their present value using an appropriate discount rate. This method requires careful analysis of the business’s financial performance, growth prospects and risk factors. By discounting future cash flows, DCF accounts for the time value of money and provides a comprehensive assessment of the business’s intrinsic value.

4. Earnings multiplier

This method applies a multiple to the business’s revenue to determine its value. The earnings multiplier, also known as the price-to-earnings (P/E) ratio, is derived from comparable transactions or market data within the industry. It reflects investors’ willingness to pay for each dollar of the business’s earnings. Generally, a higher earnings multiplier indicates greater investor confidence in the business’s future earnings potential.

5. Book value

Your business can also be valued based on its book value, which is the difference between its total assets and liabilities as recorded on the balance sheet. This method provides a straightforward assessment of the business’s net worth based on historical financial data. However, it may not fully capture the business’s true economic value, especially if its assets are not recorded at fair market value or if significant intangible assets are not adequately reflected on the balance sheet.

6. Liquidation value

This method involves estimating the value of the business’s assets if sold off individually in a liquidation scenario. It assumes that the business is no longer a going concern and that its assets would be sold at their fair market value, often at a discounted rate due to the urgency of the sale. Liquidation value can provide a floor value for the business, representing the minimum amount that the assets could fetch in a worst-case scenario.

Since marital assets are distributed equitably, it is important to get a thorough valuation of the business during divorce. At The Law Firm of Poppe & Associates, PLLC, our focus is relentless advocacy for our clients. If you or someone you know is considering divorce, reach out to schedule a consultation at 646-665-3903 or by contacting us online.

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Mia Poppe, Esq.

Mia Poppe, Esq.
Managing Partner