Valuing Your Business

Posted: 22 September, 2019

Valuing a community property business during a divorce proceeding is one of the most difficult and often most contentious issues. The goal of valuing the business is to obtain an equitable division of the value of the business. If the business is a professional practice, such as medical, dental, accounting or legal practice, valuation is more difficult. Although these practices were generally built based on the education of one party, the success of the practice can be attributed partially to the encouragement and support of the other party.

Although it may seem like an easy solution would be to simply sell the business and divide the equity, in most cases, that is not in the best interest of either party. There are methods that can be used to put a monetary value on the business so its worth can be fairly divided and all the while ensure the continued success of the business or professional practice without having to sell or dissolve it.

Market Value

This is a similar method to the one used by real estate agents when they determine the price to put on any property for sale. The sale price of other similar businesses that have been recently sold are compared. The fair market value of the community property business is determined to be within the price range for what those businesses actually sold. The problem is in finding businesses that have sold that are truly comparable. This may even be impossible. The price the business sold for may have been influenced by unknown factors, such as the motivation for the sale. The business sold may have been discounted for some unrevealed reason so the sale is not truly comparable. Other comparisons may not be accurate when the size of the business, number of employees, annual profits and other variables are considered.

Asset Approach

The asset approach adds up all the assets and liabilities of the business. The liabilities are subtracted from the assets and what is left over is divided between the parties. Unfortunately, this is not as easy as it sounds. Assets and liabilities refer to tangible and intangible property.

This method may work well for businesses that have value based on tangible assets, such as real estate, equipment, inventory and accounts receivable. An intangible asset refers to things like intellectual property, contracts for doing business and goodwill. For professional practices that have few tangible assets and gain their value more from goodwill than from the assets it owns, the asset approach is usually not the best one.

Income Approach

This is based on different mathematical approaches based on cash flow, all of which basically convert expected future profits into a present day value. The evaluator reviews the history of the specific business and compares its profits to other similar businesses. Risks of failure are also considered.

The problem with this approach is the uncertainty of predicting the future. If projected income is inaccurate, one party may well be short-changed.

The valuation process is complicated and may require a combination of methods. The services of a Las Vegas divorce attorney and a business valuation expert can ease the process and determine the most fair and accurate value of the business for an equitable distribution.