Business Valuation: Why Do It?

Other than child custody, how to value and divide a business is one of the most contentious issues in a divorce. One or both spouses can put huge amount of time and energy into building a business and attempts to divide it fairly can be a source of conflict in a divorce.

Business Valuations should be done if the spouses cannot agree on the business’s value or if they are uncertain about the business’s value. At times one spouse can balk at the idea of paying for business valuation but it is money well spent because it can help avoid expensive and time consuming litigation.

What to Consider when Choosing a Business Valuator

Finding the right expert is important in preparing a business valuation. Divorce attorneys in Connecticut and general accountants do not have the requisite specialized training to help divorcing couples with business valuations. It is very important during the divorce process that businesses are correctly and expertly valuated by a business valuator or appraiser with specialized training. The appraiser should be familiar with state divorce law in CT. The spouses should interview the valuator together and mutually decide who will perform the service. A mutual and neutral decision ensures that at the end of the process both spouses will be comfortable with the values.

While divorcing spouses have ongoing conflict regarding the value of a business, trained mediators and collaborative counsel can break the conflict cycle. The impasse is resolved when divorcing spouses remain committed to avoiding drawn out and costly litigation and agree to a mutual and neutral platform for placing a dollar value on the business.

Just as a bank performs a certified valuation of real estate before issuing a mortgage or a dealer valuates a diamond ring or automobile, an expert business valuator ensures that a fair market value of a business is derived from reasonable knowledge of the relevant facts.

Calculating the value of a business isn’t an exact science and there are different ways to determine value. However, the Institute of Business Appraisers (IBA) and the American Society of Appraisers (ASA) have issued standards for valuing businesses. Utilizing common standards helps to ensure that even if two different appraisers arrive at different values, the values will be close.

Standard of Value – Fair Market Value vs. Investment Value

In valuing a business, the appraiser must define what “standard of value” the appraiser will use; fair market value or investment value.

Very simply put, “fair market value” is the amount for which a business would be sold between a hypothetical willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts about the business.

Investment value or strategic value is the value of the business based on what it’s worth to the buyer; this value can be based on more than just money. For example a business that holds patents, has access to markets or employees the buying company would like to acquire can be worth significantly more to the buyer than the fair market value.

At CT Mediation Center we refer divorcing clients to experienced business valuators, that have an in-depth understanding of the differences between the methods of valuation. The valuators are specially credentialed as Accredited in Business Valuation (ABV) by the AICPA and also are recognized as Certified Valuation Analysts (CVA's) by NACVA (National Association of Certified Valuation Analysts).