Albuquerque Business Valuation Attorneys

What Goes Into a Business Appraisal for a Divorce Case?

When a divorce involves a closely-held business or professional practice, accurately appraising its value becomes one of the most complex elements of property division. Unlike publicly traded companies with readily available stock prices, determining the fair market value of a private business requires a deep dive into its financial health, industry standing, and future prospects. The appraisal process is crucial for fairly dividing the marital estate, calculating potential spousal support, and creating a stable financial future for both parties post-divorce.

Here are some of the key considerations and methods in business appraisal:

• Determining community property versus separate property. The first step is to determine what portion of the business is considered community property. If a business was started during the marriage, it's generally community property. However, if one spouse owned the business before marriage, it's separate property, but any increase in its value during the marriage due to community efforts or funds may be considered community property and is thus subject to division. The appraiser often needs to trace financial contributions and evaluate growth during the marriage to make this crucial distinction.
• Valuation methods. Business appraisers typically use one or a combination of three primary approaches. The income method values the business based on its ability to generate future earnings or cash flow. It involves analyzing historical financial performance, projecting future income, and then discounting those projected earnings back to a present value using a capitalization or discount rate that accounts for the risk associated with the business. The market approach compares the business being valued to similar businesses that have recently been sold in the marketplace. It involves identifying comparable transactions and applying relevant multiples derived from those sales to estimate the value of the subject business. Finally, the asset approach values the business based on the fair market value of its tangible and intangible assets minus its liabilities. It's often used for businesses with significant tangible assets like real estate, equipment, or inventory, or for businesses that are not highly profitable and whose value primarily lies in their underlying assets.