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How do you value your business in a divorce?

On Behalf of | Jul 13, 2021 | Divorce |

Divorce is stressful as it is, but when you own a business together, it can be even more complicated. A business is a marital asset, so whether you and your spouse operated the business together or not, each spouse may be entitled to a portion of the value of the business in Illinois. It may help to gain an understanding of the different ways that businesses are valued to be sure your rights are protected.

Multiple analysis

“Multiples” is a generic term used in stock analysis, usually a ratio that is created by dividing the estimated value of an asset by a specific item on a financial statement. That is then analyzed by comparing it to other companies in the same industry. For instance, the analyst may use the ratio of two times your revenue or five times your cash flow, comparing the result with similar businesses in your industry. If the business you are valuing as part of your divorce is capital-intensive, your analyst may use multiple assets while non-capital-intensive businesses usually use cash flow or revenue.

Discounted cash flow

If you own a privately held company, your analyst may use discounted cash flow. This method determines the value of the company by looking at the value of investment in the company in the future. The formula calculates how much your investment would be worth today by predicting what it will be worth down the road. This type of analysis is beneficial for determining whether investment is a good opportunity, but the fact remains that your business is only worth what someone will pay for it today, not what it may be worth in the future. This method can also be somewhat manipulated, which makes it risky in a divorce settlement.

Fair market value

Fair market value is the price that your business would sell for in the open market. It requires that a buyer be reasonably knowledgeable about your company, you must both act in your best interests, not be pressured to complete the transaction and be given reasonable time for the transaction to take place. Each aspect of your business is given a specific value to determine what it is worth as part of the divorce settlement.

This is another method of valuation that can be manipulated. There have been instances where a spouse has used a false fair market value of a business during the settlement only to sell the business a few months after the divorce is final for a significant amount more than the value used in the divorce. Cases like those make it clear why speaking to an attorney before agreeing to a business value in a divorce is critical.

Asset division can be extremely complicated. You may benefit from seeking the advice of an attorney before you sign any agreements.