You worked hard to make your business a success for yourself and for your family. Now that your marriage is ending, at least a portion of your business becomes part of the marital estate. A valuation is required for property division purposes. Georgia divides marital property based on an equitable distribution, which means a fair distribution, not necessarily an equal one.

How will the value of your business be determined?

Three basic methods of valuation exist:

1. An asset-based (or cost-based) method values your business based on what creating a similar business costs. First, tabulate the market values of your company’s assets and liabilities. The difference between the two equals the value of the business. Items typically not included on an accounting balance sheet such as customer lists and intellectual property add to the assets. Conversely, litigation, liens and costs associated with legal and regulatory compliance add to the liabilities. A capitalized excess earnings asset-based approach allows for the calculation of goodwill as well.

2. An income-based method values potential income and risk. This method takes into consideration discounted cash flow, multiple of discretionary earnings and capitalization of earnings.

3. A market-based method compares your business to recent sales of similar businesses. Preferably, sales of similar private companies should be used, but a lack of data makes this problematic in some cases. Therefore, publicly traded companies with similar products or service bases provide sale price estimates. The resulting comparisons provide a fair market value of your company.

In some cases, a combination of valuation methods results in the most accurate assessment of value.

Which method provides the best value for your business?

Determining which valuation method works best in your situation requires careful assessment and a thorough review of all applicable information. If you started your business prior to the marriage, an assessment of its value at the time of the marriage might reduce its marital portion. When it comes to divorce, too high or too low a value jeopardizes your post-divorce finances, especially if your spouse requested alimony.

Furthermore, a failure to include all of the assets of the business often ends up costing you and your business in the end. Full disclosure usually prevents additional financial losses in the future even if the court awards a larger portion of the value of the business to your spouse or awards him or her more in alimony.

If you and your spouse forego the traditional adversarial system and negotiate a settlement without the court’s intervention, the possibility of exchanging one or more assets for your spouse’s interest in the company exists. This allows you to leave the marriage with all of the marital interest in the business, yet still allows for an equitable settlement with which each of you is satisfied.