Valuation of assets is often a contentious issue during divorce proceedings. The parties may offer competing experts, each with an appraisal that is beneficial to the spouse offering it. This common problem becomes even more complex when a closely held business is involved.
While valuing a person or real property can be complex in its own right, valuing a business is even more subjective. It is often possible for distinguished and experienced experts to arrive at vastly different appraisals for the same business. This can quickly create conflict and stall divorce negotiations. To promote some uniformity, experts in the process of business appraisal generally rely on three distinct valuation methods: the comparable sales approach, the income statement approach, and the balance sheet approach.
The comparable sales approach is the simplest, by which an appraiser simply examines the sale value of similar businesses that have recently changed hands in the same area. This provides a practical estimate but may be difficult in the case of unique or novel businesses, or following a period of economic change.
The income statement and balance sheet approaches depend upon a fair and accurate accounting of the assets, liabilities, and profitability of a business. Unfortunately, these approaches require a great deal of information and can vary based on the quality of the data and the accounting method used. But in cases where no comparable sales figures are available, these approaches may provide the only reliable option for valuing a business.
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Last update of the article: 07/08/2020