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Are you selling your business as part of the divorce?

Perhaps you and your spouse opened a business during the marriage. Over the years, the business thrived, but your marriage did not. Now, as you face a divorce, you agreed that selling the business is the best choice for you both.

The question is determining its value. You and your soon-to-be spouse agreed on how to split the proceeds, but you want to make sure you get a good price since you won't be sharing the money together. Instead, each of you only receives a share as part of the divorce. You have a choice of methods for valuing your business depending on your circumstances.

Choice No. 1: What your business could earn in the future

Does your business have a profitable future? That depends on its past earnings. The appraiser will look at how your business has done in the past to make an educated guess regarding its ability to continue to make money in the future. Appraisers consider additional factors as well depending on the specific earnings method used.

One of the biggest unknowns in this method of valuation is your relationships with your customers or clients. When the business changes hands, will customers come back because they were loyal to your business or to you?

Choice No. 2: The business's assets determine the value

Valuations based on your assets determine a value for your business based on total assets and investments. You can assume a liquidation scenario, in which the value of your business is the net cash left over after selling all assets and paying all debts. The going-concern approach simply adds up the value of all assets and subtracts your debts.

This works if your company owns all of the assets and its debts are easily identifiable. In a sole proprietorship, the lines between you and the business may be blurred.

Choice No. 3: What have other businesses sold for in your area?

You could also employ a market approach to the value of your business. This method compares your business to similar ones sold recently here in the Waco area. Of course, this only works well if enough businesses have sold recently to provide you with sufficient data.

It may also be a challenge to determine what other sole proprietorships sold for if this is your business model.

Choice No. 4: Why not use all of them?

The good thing about business valuation methods is that you don't have to choose just one. You can use a combination of the above methods. This could provide you with the best value possible. You may also decide to combine methods if you and the other party are not able to agree on one method. Proposing to use more than one method could alleviate the need for each of you to get separate appraisals and possibly ending up in court arguing over what the value should be. 

With all of the issues that require your attention during a divorce, deciding on a valuation method for your business does not have to be a point of contention. These are just simple outlines of the ways you can value your business. More than likely you still have questions that need answering. You can get answers to questions about selling your business in a divorce, along with any other questions you have about your divorce.

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