During property division, you probably have questions. What will you lose? What will happen to your retirement accounts or your family home? For business owners, one question may be particularly pressing: what will happen to your business?
If the court considers your business to be marital property, it will need to be considered in property division. To ensure that you and your spouse get your fair share, you will have to determine the value of the business you have built. There are generally three ways to determine the value of your business: the asset-based approach, the market value approach and the income-based approach.
The asset-based approach: determining value based on property holdings
Many businesses invest their profits in real estate, additional inventory or manufacturing equipment. Others develop particularly valuable intellectual property. In these cases, those assets add significant value to the business, and they should be considered when determining the value of the business itself.
The market value approach: using similar businesses to determine value
Owners of businesses in a competitive market may want to use the market value approach to determine the value of their company. This approach estimates its value by comparing it to similar businesses that have recently sold in the area. While this method gives you a clear indication of how much the business may sell for, it also requires similar business sales in your area in order to make that comparison.
The income-based approach: estimating value through earning potential
Also called the earning value approach, this method estimates the value to a buyer through future profit potential. This method is one of the most popular, especially for businesses with steady earnings.
Whether you choose to sell your company and split the proceeds or buy out your spouse’s share of the business, business valuation is an essential step in property division for business owners.