Scottsdale Business Valuations
A business valuation is a very common occurrence during a divorce in which one or both spouses own one or more businesses. In order to put a value or dollar amount on the value of this asset, the attorneys and the Court will often need a business valuation.
A business valuation, in the simplest terms, will state what the value of the business is which includes a calculation of not only the “nuts & bolts” such as equipment and inventory, but also includes the not so visible assets of the business such as its reputation with customers and in the industry and retention of current customers. A business valuation expert, usually an accountant or CPA who has further education and specialization in valuing businesses, will be retained by one or both parties to examine the books and records of the company, inspect the equipment and inventory, and perform a market analysis. Based on this data, they will then perform the calculations necessary to determine the value of the business.
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Typically, a business valuation expert will utilize three (3) different approaches to analyze and reach a conclusion on their opinion as to value of your business:
- Asset approach
- Market approach
- Income approach
Which one of these approaches the business valuator eventually determines, in their opinion, gives the most accurate and “best” valuation for your business can be dependent on many different factors, such as: whether your business is a service-based industry or manufactures a specific item, whether it is a “niche” business with little marketability or the type of business that transfers easily on a regular basis, and the condition of your books and records. Therefore, depending on approach, opinions between business valuation experts can vary dramatically depending on the specific facts and circumstances of your particular business.
Simply put, under an income based approach, the business valuator looks at the financial history of the business using tax returns, profit and loss statements, balance sheets – ie., “the books” - and uses the past performance of the business to project future earnings and cash flow to calculate the value of the business.
In the asset approach method, the valuator is strictly looking at the balance sheet for the business along with an inventory of the equipment, inventory, and other actual physical assets of the business. This works extremely well for a manufacturing entity that has a physical plant, machinery, and an inventory of product warehoused – the prototypical “widget” producer. We then figure out the value of all the assets, deduct all the liabilities, and come up with a “value” for the business.
Under the market approach, similar to a real estate market comparison or sales appraisal, the valuator is looking at other similar business to arrive at a value of your business based on the comparison with the value of these other, similar businesses. Business valuators have access, through industry-wide sources that keep data for the sales and values of a number of industries and businesses to use as a gauge for comparison in arriving at a valuation for your business. If you are contemplating or facing a divorce and own one or more businesses, it is more likely than not that you will be required to have the business valued and you will need the services of a business valuation expert and an experienced divorce attorney.