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What is your small business worth? The answer matters in divorce.

On Behalf of | Jun 5, 2024 | Business & Asset Valuation, Divorce

When a business owner divorces the stakes are often high. After investing their time, passion and finances into a company, dividing their business change the direction of their professional and financial life. With so much at stake, learning the value of your business is a critical step.

Why is business valuation so important?

When a couple decides to part ways, the process of dividing assets becomes crucial, particularly if they co-own a small business. This business is not just a source of income but also a major component of their joint financial estate. Achieving a fair division of assets often depends on an accurate understanding of the business’s value.

Appropriate valuation is also important even if one spouse was the sole owner prior to the marriage. If both spouses contributed to the company, the court may view the increase in the value of the business during the marriage as jointly owned.

How do experts determine the value of a small business?

Valuing a small business in a divorce generally involves hiring a professional business appraiser. Each business is unique, and choosing the appropriate valuation method can significantly affect the outcome. Common valuation methods include:

  • Asset-based approach: This method calculates the value based on the business’s total net assets. It involves adding up all the assets of the business and subtracting the liabilities. This approach seems simple, but that simplicity means that the true earning potential of the business might not be reflected in the estimated value.
  • Income-based approach: This approach uses an estimate of the business’s the future income to determine its value. This method can be very telling of the business’s potential but relies heavily on accurate forecasting.
  • Market-based approach: This method estimates the business’s value based on the sales of similar businesses in the market. It provides a market perspective, but it can be challenging if there are not many similar business sales.

A fair and transparent evaluation, often conducted by financial experts, ensures that both parties receive their rightful share during property division. This is not only crucial for their immediate financial security but also for their long-term financial health.