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Two business valuation models that can be used in a divorce

On Behalf of | Feb 6, 2023 | Divorce

If you own a business and are facing divorce, you face complex property division issues. Your business, if it is considered a community asset, might be subject to division per California law.

If this is a possibility, you will want to make sure you obtain an accurate valuation of your business. There are a variety of models to accomplish this, two of which are measuring your business’ going-concern value or its liquidation value.

The liquidation value model

The liquidation value of your business is that that would be netted if all your business’ tangible assets were sold. While this assumes the business would cease operations, you can calculate a liquidation value even if you do not yet plan on selling your business.

Tangible assets include:

  • Real estate and fixtures
  • Equipment used in business operations, and
  • The business’ remaining inventory

You should note that a liquidation value could be lowered if the tangible assets will be sold at a loss in order to recoup as much money as possible as quickly as possible.

The going-concern valuation model

The going-concern value of your business runs on the assumption that whether you are keeping the business or selling the business, it is going to continue to be operational and continue generating a profit.

An essential component of a business’ going-concern value is its goodwill. Goodwill includes intangible assets such as the business’ brands, intellectual property and customer loyalty.

An advantage to the going-concern model is that, with no reason to believe the business will cease operations, it will continue to earn a profit adding value that goes beyond that of tangible assets.

Business valuation in a divorce

Either of these valuation models can be useful in a divorce. If it is likely your business will be sold at a loss or go bankrupt, it might be useful to ascertain its liquid value. If it is likely your business will continue to be profitable, it might be useful to ascertain its going-concern value.

Knowing the value of your business is useful when it comes to property division in a divorce, as it can either add to the value of your separate assets or help reach a fair division of community assets.