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Factors that go into a business valuation during divorce

On Behalf of | Aug 6, 2023 | Business Valuation |

Determining the valuation of a family-owned business during a divorce can be a complex and sensitive task. It’s not just about numbers. Several nuanced factors can significantly impact a company’s value.

Anyone going through this situation should understand that these key elements that affect the valuation process and should seek any professional guidance that they may require accordingly.

Future earning potential and profitability

Business valuation isn’t just about the current state of a company. It’s also about future earning potential and profitability. This requires a detailed analysis of the business’s historical financial data, industry trends, market position and growth potential. A company with strong future prospects will have a higher valuation compared to one with limited growth opportunities and/or volatile earnings.

The structure and nature of the business

The type of business and its structure can also influence valuation. For example, if a company heavily relies on personal relationships maintained by one spouse, its value might decline if that spouse leaves. Similarly, relocating one spouse could affect the business value if the business’s success is tied to a specific location where both spouses reside.

Presence of business assets

The business’s tangible and intangible assets will also play a significant role in valuation. Tangible assets like real estate, equipment and inventory contribute to value. Intangible assets such as trademarks, customer lists and goodwill also hold value and should be considered.

Existing legal agreements

Existing legal agreements related to the business, such as a buy-sell agreement, prenuptial agreement or operating agreement, can also affect its valuation. These agreements may predetermine the value of a spouse’s interest in the business or set terms for how the business interest can be transferred during divorce.

The valuation of a family-owned business during a divorce involves a multitude of factors, so understanding them is crucial to better ensure you receive an accurate share of your interests in that venture.