Performing a Fair Evaluation
Renkin & Associates points out that when it comes to issues surrounding divorce, a business evaluation is often an important concern. The business may be considered marital property and,as such, it is subject to division. In order to divide the business in a fair and equitable manner, however, the value of the business must be determined.
To perform a fair market valuation, the value of the business is determined by various elements including but not limited tothe nature and longevity, economic outlook, net worth, earning capacity, dividends, amount of stock (voting or non-voting),earning capacity, and stock prices based on comparables of similar businesses.
Based on the above-mentioned elements, Renkin & Associatesstates that the earning capacity and financial condition possesses the most relevance. Future operating performance determines the return on investment and is a key factor in determining value.
Sole Managed Businesses
Renkin & Associates states that if a business is a sole managed firm, the Excess Earnings Method will be the most applicableto evaluate the good will of the business. The Excess Earnings Method is the difference between the practitioner’s earnings (salary + benefits + pre-tax profit) and “reasonable compensation” (what s/he could earn in the same position as a non-owner / non-partner employee of a comparable firm). In the context of divorce, however, it is preferable to provide an initial range of value because it is much easier for the spouses to agree on a range of value than on a specific dollar amount. Once done, settling on a final number becomes a much more manageable task. Often, the value of the business can be negotiated against spousal support and other issues in the case.
Business Valuation Conclusion
If the spouse to be supported is relatively young, s/he may desire a buy-out that can be used as an investment or retirement. On the other hand, if a person has little income history, they may be focused on maintaining a certain lifestyle they are accustomed to. A range of value assists the couple to carve out this kind of win-win.
The expert’s role is to guide the divorcing couple to mutually agree on a value for the business that they both consider fair. If the expert is able to accomplish this, s/he will have made an important contribution to the family, especially for the children.
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