If you are thinking about ending your marriage, you probably already know you and your soon-to-be ex-spouse must divide marital assets. Because your business may be one of your more valuable assets, you should pursue a realistic valuation when planning your divorce.
The method you use to value your business usually depends on the reason for the valuation. That is, you may choose a different valuation for selling, seeking a loan or attracting investors. When it comes to divorce, though, three valuation methods are popular.
1. Market-based valuation
With market-based valuation, you determine how much your business is worth based upon what it would likely fetch on the open market. To proceed with this valuation approach, you find comparable and recent business sales in the area where your business operates.
2. Book-based valuation
Book-based valuation, you use the value of your assets to calculate the value of your business. This approach requires you to add together everything your business owns after adjusting for depreciation. If your venture has considerable assets, this valuation method may result in a high valuation.
3. Income-based valuation
If you choose income-based valuation, you use your business’s revenue records to calculate value. This model relies on past sales figures to project future business income.
Just as there are three common ways to value a business during a divorce, you probably have at least three options for addressing ownership of your business after your marriage ends. Nevertheless, because the valuation method you choose may make a meaningful difference, you should research the pros and cons of every approach before settling on one.