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3 ways to value a business for divorce purposes

On Behalf of | Mar 30, 2020 | divorce |

Many divorcing couples do not work at the same place as their soon-to-be ex-spouse. Nonetheless, you and your partner may have decided to start a small business together. If you did so during the course of your marriage, there is a good chance the venture is marital property. As such, you must decide who owns the business after you divorce.

In Louisiana, spouses must divide marital property and debts equally. When it comes to your business, you have some options. You may continue to jointly own the venture, sell it to a third party, buy out your spouse’s ownership interest or ask your partner to buy out yours. Regardless, you must know how much the business is worth. Here are three possible ways to value a business for divorce purposes:

  1. Income-based valuation 

To determine the value of a business using the income-based approach, you must consider the future earnings potential of the venture. If you go this route, you must project income and cash flow, adjusting for expenses. Naturally, this type of valuation can be difficult, as it does not account for unexpected downturns or upticks in either the business or the market.

  1. Asset-based valuation 

The asset-based approach to business valuation is arguably the easiest. To determine the worth of the venture under this theory, you add the company’s assets and subtract its liabilities. There may be some ambiguity though. That is, you and your soon-to-be ex-spouse may disagree about which assets or liabilities to include in the valuation.

  1. Market-based valuation 

If neither income-based nor asset-based valuation appeals to you, you may opt to analyze the worth of the business based on its market value. This approach calculates the venture’s value based on market forces. Typically, you would find a similar business that has sold recently to project what your company may fetch on the open market.

If you are divorcing your spouse, the value of your jointly owned business matters a great deal. The method you choose to value the business may also make a tremendous difference. With the right approach, you can better advocate for your fair share of the venture’s worth.