3 Common Methods of Valuing Small Business in an Oakland County Divorce

 Posted on February 17, 2022 in Divorce

At the heart of every Michigan community are dozens of small businesses run by hard-working business owners. In fact, most small businesses in Michigan have less than 20 employees, making this not only one of the most common types of business but also a very common community asset in a Michigan divorce. Whether a small business is full-time, part-time, or just a minor side hustle, it is generally considered marital property and must be divided in a divorce—even if the business was started before the marriage began. 

Ensuring you get a fair division of marital property is an essential part of any good divorce settlement. To do this, small business owners must ensure their business is valued correctly. In this blog, we will discuss three of the most common methods of valuing small businesses in Oakland County divorces. 

Market Valuation Method

Many business valuation experts believe that the market valuation method is the most subjectively accurate method for determining a business’s value. This is because the market valuation method looks at the recent sales of similar businesses in the area to estimate what a particular business would sell for now. You can think of this method as being somewhat similar to how home values are assessed. Market valuation methods are not always helpful because there may be no similar businesses that have sold recently enough to be relevant. 

Asset Valuation Method

The asset valuation method uses a company’s net assets to calculate the company’s value. This method takes into account the debts and other liabilities of a business and is therefore does not necessarily present an accurate picture of a business’s potential success; a business may be bringing in a tidy sum of money but have significant debts at the time of the valuation, leading to an undervalued estimation of the business’s true worth. 

Income Valuation Method

This method bases a business’s current value on its past ability to generate revenue. Determining a business’s capitalization rate, which is the business owner’s expected rate of return, requires analyzing past cash flow, unusual or one-time expenses, and purchasing trends. While the income valuation method is not appropriate for every business, it can be useful for older, stable businesses that are not projected to see large changes in cash flow. 

Contact a Farmington Hills, MI Marital Property Lawyer

Many small business owners fear that a divorce will have a permanent negative impact on their business’s ability to thrive. To get help protecting your business, as well as your other rights and interests in your divorce, consider working with an experienced Farmington Hills marital property attorney with Elkouri Heath, PLC. We have helped countless couples ensure a fair marital property division that protects their personal financial interests. Call us today to schedule a free initial consultation at 248-344-9700. 

Source: 

https://www.fundera.com/blog/business-valuation-methods