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How is a small business’ value determined during divorce?

Though most business owners have some idea of what their company is worth, they likely do not have a firm dollar figure in mind. Getting a valuation of your business has many possible functions, from estate planning to getting a fair price on a sale. It can also be a vital task if the owner or one of the partners is going through divorce.

If the business is a marital asset, then the spouses will probably both want an equitable share of it, or one spouse will have to buy out the other. Before this can happen, the spouses need to know the value of the thing they are dividing up.

An article in Central Penn Business Journal examines business valuation and the three “pillars” of determining that worth. They are:

  • Market value. When determining the value of a closely-held business, an analyst will often examine market transactions of similar businesses. Think of when a real estate agent uses the selling prices of nearby homes of similar condition to come up with a selling price for your home.
  • Adjusting for reality. Other factors include the owners’ salaries and the rent the business pays. Current ownership may be keeping these numbers artificially low, so the analyst might have to make adjustments.
  • Goodwill. Besides the dollar figures on the ledger, a business’ value can be measured in its reputation. Is it known for providing excellent service, superior products or both?

It is unlikely that a small-business owner in Virginia will want to break up his or her company in divorce. This can be avoided through negotiation of a fair financial settlement.

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