How Are Businesses Appraised During a Divorce?

Pennsylvania is considered an equitable distribution state. That means that assets are divided fairly—not necessarily evenly. All assets that are considered a part of the marital estate are divided between the parties to a divorce. In order to do this fairly, assets, including businesses, must be appraised. The process of valuating a business is essential because it ensures that the division of assets is equitable.

It is, therefore, imperative to have an accurate business appraisal to prevent disputes and provide a clear picture of the couple’s financial landscape. Without a precise valuation, one spouse could end up with an unfairly disproportionate share of the assets. This could, in turn, lead to a prolonged legal battle.

Why business appraisal is important to the divorce process 

The appraisal of a business owned by one or both spouses is a crucial aspect of the divorce process. In the case where one spouse is awarded the entire business, that might avail the other spouse a greater share of the rest of the marital estate. This balancing act is crucial to dividing the marital estate.

To accomplish this successfully, the process requires an understanding of the business’s worth. The appraisal will take into account its revenue, market position, and potential for future growth. An accurate appraisal ensures that both parties can move forward with fair compensation from the marital estate.

How is a business appraisal accomplished? 

Three common methods of appraising a business include:

• The market approach,
• The income approach,
• And the asset-based approach.

Each method has its own criteria and calculations that are tailored to different types of businesses.

• The income approach

The income approach to business valuation focuses on the business’s capacity to generate future earnings. The method involves estimating the future cash flow that the business is expected to produce and then discounting the income to its present value. The discount rate reflects the risk associated with the business’s future earnings. The method is employed for businesses with a stable and predictable income stream.

• The market approach 

The market approach to business valuation involves comparing the business to similar businesses that have recently been sold. This method relies on market data to determine the business’s value. This approach is effective for businesses in well-established industries with a market for buying and selling businesses. 

• The asset-based approach 

The asset-based approach focuses on the value of the business’s tangible and intangible assets. This involves calculating the net asset value by subtracting liabilities from the total of value of the business’s assets. Assets can include property, equipment, inventory, intellectual property, brand value, and customer relationships. This method is useful for businesses with significant physical assets or those that are not currently generating a lot of income.

Talk to a Philadelphia Divorce Lawyer Today 

The Law Offices of Lauren H. Kane represent the interests of Philadelphia residents who are pursuing a divorce. Call our Philadelphia family lawyers today to schedule an appointment, and we can begin representing your interests right away.