Business Valuation Overview

How Are Businesses Handled In A Divorce?

One of the most complex areas in family law is the valuation of a business interest and the determination and calculation of any equitable apportionment or right to reimbursement relative to any increase in the value of a business that was owned by one party before the date of marriage.

The court may award the business to either party and, although rare, it may order it to be sold or award it to the parties jointly. The valuation of a business generally requires the services of a valuation expert.

See our Business Valuation Practice Area Page

Valuation Method: Capitalization of Excess Earnings (Asset Based Approach)

Book Value (Assets on the
Corporate Books After
Depreciation
$200,000
Adjustment of assets to FMV + 100,000
Adjusted Book Value $300,000 (A)
Earnings of Business Plus Total
/ Compensation of Operating
Spouse (5 years average)
400,000*
Return on adjusted book value
(5% x $300,000)
– 15,000
Reasonable Compensation
of Operating Spouse
– 150,000
Excess Compensation 235,000
Multiple × 2
Goodwill $470,000 (B)
Total Fair Market Value $770,000 (A) + (B)

Asset Based Approach

Book value (assets less
liabilities)

Adjust assets to fair market
value

Add goodwill (likelihood of
continued public patronage/
business’s ability to generate
superior earnings)

Valuation

Valuation Method: Capitalization of Earnings (Income Based Approach)

Earnings of Business Plus Total
Compensation of Operating Spouse
(5 years average)
$400,000
Reasonable Compensation – 150,000
250,000
Multiple Excess Compensation x 3
Total Fair Market Value $750,000***

 

*** Add any non-operating assets and excess working capital to the value of the business

Income Based Approach

Determine Earnings of Business Plus Total Compensation of Operating Spouse Less Reasonable Compensation for Operating Spouse

Apply a Multiplier/CAP Rate*

Add Back Any
Non-Operating Assets

* The multiplier/CAP rate used in an asset based approach is not the same as the multiple/CAP rate used in an income based approach.