How Is a Business Valuation Performed During a Divorce?

 Posted on June 03, 2024 in Divorce

There are numerous financial topics that will need to be addressed during the divorce process. If either spouse is a business owner, or if both spouses founded or acquired a family business together, business assets may be some of the most significant financial matters to address. 

Determining the value of a business is crucial to ensure that all marital property can be divided fairly and equitably. An experienced divorce attorney can provide valuable assistance during the business valuation process, while at the same time advocating for solutions that will protect their client’s financial interests.

The Importance of Business Valuation

In Illinois, marital property must be divided equitably between divorcing spouses. To ensure a fair and equitable division, all assets acquired during the marriage, including businesses, must be properly valued. Valuing a business accurately is essential for several reasons:

• Fair distribution: Accurate valuation ensures that both spouses will be able to receive a fair share of the marital property;

• Financial planning: Understanding the value of a business helps ensure that a person can plan for their financial success post-divorce; and,

• Future earnings: The valuation can impact decisions related to spousal support or child support by ensuring that a business owner’s income will be calculated correctly.

Methods for Determining the Value of a Business

There are several methods that may be used to conduct a business valuation. The choice of method depends on the nature of the business, the available financial information, and the purpose of the valuation. A couple may need to work with financial experts such as business appraisers or forensic accountants to evaluate the assets they own. Several approaches or a combination of different methods may be used.

Asset-based approach

Using this approach, the value of a business is calculated based on its total net asset value. All business assets should be identified, including cash, accounts receivable, inventory, equipment, and real estate. All business liabilities will also be reviewed, including debts and obligations. The total liabilities will be subtracted from the total assets to determine the net value of the business. This approach can be particularly useful for businesses with significant tangible assets.

Income-based approach

This approach focuses on the business's ability to generate future income. Past earnings are analyzed to make projections about future income. Future cash flows must be estimated, and calculations need to be done to translate expected future earnings into present value. This provides an estimate of the business’s current value, its expected growth, and the ongoing value that a business provides to its owner. This method is often used for businesses with steady and predictable income streams.

Market-based approach

With the market-based approach, the value of a business is determined by comparing it to similar businesses that have been sold recently. Appraisers may review recent sales of comparable businesses in the same industry and geographic location and apply industry-specific figures (e.g., price-to-earnings ratio) to the business's financial data to estimate its value. This approach can be useful when there is sufficient market data available, and it can provide an idea of the profits that could potentially be earned if the business was sold.

Contact Our Oak Park, IL Business Valuation Attorney

Determining how to evaluate and divide business assets during a divorce can be a complex matter. At Law Office of Vincent C. Machroli, P.C., our Hillside, IL property division lawyer can provide valuable guidance during the business valuation and asset division process. To learn how we can help you ensure that your marital property will be divided fairly and equitably, contact us at 708-449-7404, and schedule a free consultation.