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3 valuation methods for your business during a divorce

On Behalf of | Oct 4, 2022 | Divorce, Divorce Involving A Business |

Businesses make divorce more complicated than they already are. If you are a small business owner, the end of your marriage might also mean some significant changes for the business.

Indiana has a high divorce rate at 12.30 percent, according to World Population Review. One thing that might help you prepare for a divorce involving a business is a professional valuation.

Generally, there are three approaches to valuating a business. The methods are market, income and asset valuation. See below for a brief overview of all three. In Indiana, a hybrid or mix of these three methods is the most common approach.

  1. Market

The market approach estimates how much the business might sell for, using similar businesses as a comparison. This is easier for franchises but more challenging for unique small businesses that have fewer comparisons. This method demonstrates what a willing purchaser would pay.

  1. Income

Valuation based on income is the most popular method. The valuator considers historical earnings to estimate future income. If the business is unstable, the valuator might measure debt, equity and salary to discount future cash flow. Stable companies are easier to valuate, especially with a long history of earnings.

  1. Asset

Asset approach method is used for businesses that do not earn a lot in profits, but have a lot of physical assets. Most evaluators will look at this method, if even just a part of the entire evaluation.

It is important to remember that the evaluator must be certified to do business evaluations in order to be an expert witness in Indiana.

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