You read in the paper that a local business just sold for $15 million. You feel your spouse’s company is about one-third the size of that operation. Does that mean your spouse has a $5 million business?
A friend said she heard you can determine the worth of a business by multiplying its income by six and suggests you do so for your spouse’s business. Is that the way it’s done?
Both examples are incorrect.
Neither of those business valuation methods are reliable. For example, a small software company named WhatsApp would have valued itself at between $50 and $60 million using the six-times-income method. But in 2014, they sold themselves to Facebook for $19 billion — more than 300 times higher.
Why it Proper Business Valuation Matters in a Divorce
If you want to learn what your spouse’s business actually is worth you need the assistance of a highly qualified and experienced business valuation expert. There are myriad reasons the owner of a company may want to know its actual value. These can include shareholder or partner disputes; gifting a portion of the business; sales, mergers, and acquisitions; divorce settlements; estate and trust matters; insolvency, and many more. Each case is different.
Types of Business Valuations
There are two basic types of business valuations:
- (1) a calculation of value is a less formal process that provides a reliable approximation of the worth of your spouse’s business, and can be used in collaborative divorces or mediated divorces where both you and your spouse can jointly agree on a value; and
- (2) a full-blown formal business valuation is important for estate planning, gifting, and divorce litigation.
Who Values a Business in a Divorce Settlement
A Certified Valuation Analyst (“CVA”) will calculate your spouse’s business’s true income by examining salaries, expenses, profits, losses, and other information. Is your spouse paying himself/herself or your family members more or less than what outside managers would cost? Does he/she have company cars or any deferred compensation programs for family members or are there any other expenses a third party would not incur? Does the business have one-time expenses related to a lawsuit or losses from a natural disaster?
In calculating your spouse’s business’s worth, a professional business valuation expert also considers industry, geographic and economic factors, as well as recent sales of businesses like his/hers.
Of course, if you are the business owner, the above discussion also applies to determining your business’s value in a divorce. Determining the value of your or your spouse’s business is not a process for psychics or soothsayers, and guessing or ballpark estimating won’t do. Be safe and smart and count on a professional business valuation expert to figure out just what your business is worth.
A divorce lawyer and neutral financial expert with the Collaborative Law Professionals of Southeastern Pennsylvania can help you value your business and respectfully resolve divorce settlement issues without traditional court litigation.
About the Author
David Anderson, CPA, CFE, CVA is a forensic accountant and collaborative business valuation expert serving divorce lawyers and their clients in Bucks County, Chester County, Delaware County, Montgomery County, and Philadelphia County, PA. He provides a full range of divorce-related business valuation and forensic accounting services including forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support services, economic damage analysis, business consulting, and outsourced CFO services. Click here to learn more about David Anderson, PA, CFE, CVA.