There is an astonishing number of small businesses here in the state of Illinois – an estimated 1.2 million, according to the most recent federal figures. These businesses only exist thanks to the hard work and dedication of their founders and owners.
A divorce feels like it puts all of that in peril.
In most cases, property division will impact either all or some portion of a small business (due to the comingling of personal finances, for example, or significant growth in value during the marriage). In order to ensure an equitable split of marital assets, the business in question must be valued. How is that done?
3 common business valuation techniques
Determining the value of a business is a tricky endeavor. It requires considering the past, current and future financial situation while accounting for a variety of external forces. Broadly speaking, financial experts use three approaches:
- The income approach: Analyzing certain financial markers (such as discounted cash flow or earnings capitalization) to determine potential earnings
- The asset approach: Using the value of a business’ assets – think machinery, intellectual property, real estate, etc. – as the basis for the value of the business itself
- The market approach: Comparing the business to other, similar operations to answer the question, “How much would this business sell for?”
Keep in mind, these are basic summaries of complex valuation procedures. In many situations, a professional financial expert will use more than one approach, or even use additional information (such as stock prices, for example) to help reach a final figure.
How this impacts divorce proceedings
During property division, the portion of a business that is considered marital property will essentially go on the ledger. Its value will help dictate how these assets are ultimately divided. Say, for example, you want to hold on to the entirety of the business. To compensate, your spouse will likely receive another piece of marital property that is of roughly equal value.
This is why an accurate valuation is vital. You should consider doing everything possible to land on the correct dollar figure. If that number is wrong, it will skew every other property division decision to come.