How Businesses are Appraised as Part of a DivorceAugust 1, 2014 | Category: Divorce, Property Division
A divorce is a very difficult process. Typically there will be disagreement on parenting issues and finance. One asset the is usually deemed the most valuable within a divorce is a business. It is crucial to understand the various ways to appraise a business, if you own one.
There are three common approaches to having a business appraised:
- The asset approach: Based on the value of the assets and liabilities of your business, including tangible and intangible assets.
- The income approach: Estimates the value of the business through expected economic variables, such as profits or cash flow. It can be based on historical information dealing with past and present profits.
- The market approach: Compares your business to similar businesses that have been recently sold.
Each approach has its own strengths. Make sure you invest in a skilled appraiser/expert to evaluate your business. Selecting the wrong appraiser can cost you a lot of money. Our firm routinely works with the most reputable business appraisers in the Twin Cities as part of divorces in which the litigants own an interest in a business.
MORE ON THE ASSET APPROACH
This approach places a value on all tangible and intangible assets, as well as your business liabilities. This approach can seem very simple, but there are many factors that complicate things.
The value of your business assets, like cash and accounts receivable, may approximate the value of your business. One major challenge of the asset approach is valuing any unrecorded assets and liabilities such as goodwill. This approach may be good for very small businesses and companies where there are little to no goodwill.
MORE ON THE INCOME APPROACH
This approach is typically used to appraise a privately held business. There are three ways within the income approach. The main methods are the capitalized cash flow method, discounted cash flow method, and excess cash flow method.
Through this approach, an appraiser will collect and review historical financial data, while making any adjustments necessary.
MORE ON THE MARKET APPROACH
The market approach appraises a business by comparing your business to similar businesses that have recently been sold. Many people are familiar with this approach because it is the most common approach that appraisers use. The one difficulty in using the market approach involves locating transactions comparable to your business.