If you are going through a business divorce, you may be wondering what your business is really worth. Business valuation can be an important aspect of breaking up a company. This is especially true if you want to offer the business for sale. However, determining a company’s value may become complicated due to possible future earnings increases and intangibles.
Types of Business Valuations
Your business may have a buy-sell agreement in effect that provides for a method of conducting your business valuation. Buy-sell agreements could specify valuation at fair market value at the time of the sale, require use of a formula or method to determine the value, or indicate an agreed-upon value.
If you do not have a buy-sell agreement or other agreement about valuation in place, then you may need a business valuation professional to help evaluate how much your company is worth. These experts may provide you with additional methods of assessing value, such as liquidation value or book value. They may indicate a comparable value, showing what other businesses in your sector are selling for right now. Also, they may provide a discounted cash flow value, which considers your company’s predicted future earnings and discounts them to today’s value.
These different valuations have one thing in common: they are a “snapshot” of your business at the time of the valuation. Variables such as possible increases in earnings and intangibles could affect your company’s chances on the market, as described below. Getting these different valuations is still valuable, however, because it gives you a general idea of whether your company is marketable for sale during a business divorce. If you find that sale may not be the best option, you might need to reconsider how you want to proceed during the divorce. A business divorce lawyer can advise you on your options.
Future Earnings Increases’ Effect on Business Valuation
Because a valuation is a “snapshot” of your business’s finances, it may not take into account the business’s future earnings potential. Future earnings potential can increase if you make a capital investment, such as purchasing new equipment or hiring additional employees. Your snapshot valuation may not capture the increased earnings that this capital investment will bring to the business. You might need to wait a few months to a year before your earnings increase.
Unfortunately, the possibility of future earnings could hurt your chances of sale for a favorable price during a business divorce. A buyer may not be willing to pay more on the promise of speculative increased earnings that have not been realized. Meanwhile, your business may be lower on liquid assets because of your capital investment. Depending on your business’s past earnings history, you may be able to reassure possible buyers by pointing out that previous capital investments did result in realized increases in earnings. If you are in this situation, talk to your business divorce lawyer about how best to move forward.
Intangibles’ Effect on Business Valuation
Several types of intangible yet valuable items could affect your business’s valuation during a business divorce. Intangible means that it is difficult to quantify the monetary value of the item. A few examples of intangibles are:
- Patents, trademarks, and other intellectual property with unexploited or underexploited value on the market (such as opportunities for obtaining more/greater licensing fees)
- Exclusive contracts or access to exclusive distribution rights that have not been fully exploited
- Business goodwill and reputation in the industry
- A skilled management team who will remain with the company after the sale
Buyers may be willing to pay more for intangibles like these, but it is hard to assess their true value in a snapshot. In a business divorce situation when you are concerned about assessing your business’s value, consult an experienced business divorce lawyer in your area for helpful legal advice on your next steps.
The Houston Business Divorce Law Firm for You
Henke & Williams, LLP handles business divorce matters for clients regularly. We use our experience and knowledge about issues involved in a divorce to help our clients find the best solutions possible. Every business divorce is different, so we make sure to tailor legal advice to our clients’ unique situations. To set up a consultation, call 713-940-4500 or use our convenient Contact Form.