Valuing the family business in a divorce

On Behalf of | Oct 21, 2021 | Business Valuation

Absent a prenuptial agreement, as a business owner, you are probably going to have to divide the family business with your spouse in a divorce. For the most part, that might mean figuring out a way to “buy out” your spouse’s fair share of the company.

You can’t divide anything, however, until you figure out what it’s worth. Since a business is dynamic by nature, your company’s actual value may be hard to determine from month to month (or even week to week).

Where do you start when you need to put a price on a family business?

You’re probably going to need some help from accountants, financial experts and industry professionals before the process is all over, but there are three basic ways you can approach the situation:

  1. An asset-based approach: You can either look at the “book value” of the company by totaling up its assets and subtracting all its liabilities, or you can use a liquidation approach that estimates what equity the business would have after it were sold on the open market and all its liabilities were paid.
  2. A market approach: This only works well if your business tends to operate similar to other companies in the industry. If it does, you can compare your company to others in the industry that have recently sold (similar to how a real estate agent would use “comps” to figure the listing price of a home).
  3. An earnings value approach: If your business has the potential for tremendous growth, you may want to look at both the current income from the business and its projected earnings for the next decade.

Which of these approaches is best for you?

Ultimately, the approach that works best is the one that you and your spouse can agree to use. All three models have their flaws, and no valuation method is perfect. Like most things involving marriage, divorce or business, you have to decide how comfortable you are with risk. Talking the issue over with an experienced legal advocate can help you learn more.