Get a business valuation during divorce proceedings

February 27, 2013

Get a business valuation during divorce proceedings

Article provided by White & White Attorneys at Law
Visit us at http://www.thewhiteandwhitelawfirm.com

Businesses that are owned by one or both spouses are treated as assets and can be split during divorce proceedings in Tennessee. When a couple is considering divorce, it is important to get a complete and accurate valuation of the family business from a professional appraiser.

What is a business valuation?

A business valuation is a process in which a business appraiser considers a variety of financial factors to determine a value for a business. Appraisers use the market value of physical assets, financial statements and future growth prospects to assign an accurate value to a business. There are several methods appraisers use individually or in combination to reach an accurate business valuation.

Asset-based business valuations

Sometimes, business appraisers may use an asset-based method to place value on a business. In an asset-based valuation, businesses are considered worth at least as much as the sum of their salable parts. There are two values appraisers may use to value a business based on its assets: book value and liquidation value.

The book value of a business is based on an owner's equity on the business's balance sheet. Then, this value is adjusted to account for the business's past costs and depreciation. The book value makes a good basis for a business's minimum value. The liquidation value of a business is based on what would remain of a business after it had to suddenly pay off all of its debts.

Historical earnings valuations

A historical earnings valuation is another way business appraisers can arrive at a value. A historical earnings valuation is a conservative estimate of how a business may perform in the future. There are a few ways appraisers may arrive at a historical earnings valuation.

For buyers, one of the more popular ways to determine a historical earnings valuation is to assess a business's ability to pay debts. New buyers often need to take out loans to purchase a business, so being able to pay off these loans quickly through the business is important.

Other ways to determine a historical earnings valuation is to use capitalization of earnings or cash flow, which determines a business's value by considering earnings before interest and taxes, gross income multipliers and dividend-paying ability.

Assets and earning valuations

Assets and earning valuations, also known as the excess earning method, is used by the IRS to determine estate and gift taxes. It is based on the assets and historical earnings of a business. To determine a value using this method, appraisers deduct the owner's excess salary and perks as well as the non-operating income and expenses of the business for the past year or average of the past three to five years. Using these figures, appraisers find the difference between assets and historical earnings. If there is one, the difference is called excess earnings.

Partial interest valuations

Partial interest valuations are used when a business owner wants to sell or give away part of his or her business. This may occur in family-owned businesses when the majority of the company is in the founder's name and minority shares are in children's and/or a spouse's names.

When there is a partial sale or part of a business is given away, minority shares are protected by state laws. These laws ensure that the minority shareholders will receive a share of the sale that is proportionate to their share in the company. Inversely, majority shareholders often receive a little more than the percentage they hold. For example, a 75 percent share of a company may be valued at 90 percent in a sale. This is known as a majority interest premium.

There are many different ways to value a business during divorce proceedings. A professional business appraiser will be able to provide the best option for spouses considering a divorce. To learn more about business valuation and divorce, contact an experienced family law attorney who understands the importance of having a business accurately and completely appraised.