As a business owner, valuing your business may be one of the most daunting processes you will confront. This process becomes even more difficult during a divorce. Because there are multiple valuation methods and various factors to be considered, business valuation can be surprisingly subjective. In high-net-worth divorces, both parties are likely to hire their own expert to value the business and testify about their findings. This is especially likely if the spouses are co-owners or even if one spouse is a sole owner but the other plays a significant role in the business. In smaller-asset divorces, however, it is more common for parties to attempt to value the business themselves.
So how do I value my own business?
First, it is important to identify your business’ assets, which typically include both tangible and intangible property. Tangible property includes but is not limited to: inventory; savings accounts; and equipment necessary for day-to-day business operations. Intangible property includes but is not limited to: goodwill with your clients; patents and trademarks; and software.
To ascertain the starting value of your business, subtract your liabilities from your assets. Liabilities are anything that costs your business money, such as loans, payroll, or credit card debt.
It is also important to determine your business’ net profit. In order to do so, take the total amount of cash received by the company in exchange for goods or services, including investment related income or income from the sale of business assets, and subtract all of your business’ expenses (i.e. salaries, advertising, equipment, or anything used to reach that cash inflow).
Finally, what method is best to do my valuation?
There is not one “right” method, but here are two common approaches:
The first approach is termed the “book value” method. “Book value” refers to what the business’ corporate books say the assets are worth. To calculate the book value of your business, generally you would take the original cost of the asset, subtract depreciation of the asset based on its age, and apply any adjustment for market-based value increases. Good examples of calculable assets are vehicles, since their value tends to decrease over time, and any buildings or land that your business owns, since real property often increases in value over time.
The second valuation method is the “market approach” method. This method focuses on the value or earning capacity of the business itself. If you apply the market approach method, look at your business’ income and the value of its assets over the past five years, as well as any fluctuations in income, and make an estimate as to how the business will perform over the upcoming five years.