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Many times in a divorce, a significant portion of the marital estate is a business. In these situations, the parties will frequently disagree on the value of the business. To understand the value of a business and the disagreement of the parties, two very important concepts need to be discussed: Standard of Value and Approaches to Value.
Standard of Value
The most common standards of value are fair market value, fair value, investment value (also called value to owner), and liquidation value. Each of these standards of value will arrive at a different value of the business. The standard used depends of the purpose of the valuation. In other words, why is the valuation being done? Is it for a divorce, selling, buying, IRS, estate planning, etc.?
The primary standard of value in Texas matrimonial cases is “fair market value.” The secondary standard of value is “value to the owner.”
Approaches to Value
There are three approaches to value.
1. The Market Approach
The value of the company is derived from sales of similar companies. This is commonly referred to as “comparable sales”. For how much have similar companies sold?
2. The Income Approach
This approach is based on the assumption that an investor will pay money for the cash flow of a company, both now and into the future. The value is the present value of expected future earnings.
3. The Asset Approach
This is the least common approach used. The theory behind this approach is that the business is worth the assets minus the liabilities. In other words, the business is worth its machines, tools, properties and so forth, minus its loans.
Getting an accurate valuation of a business can be essential in a divorce case. If you have questions, or if you have a need for a business valuation, please contact us. We offer business valuation services at a competitive price and normally within 3 - 4 weeks of obtaining the required data.