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Earning value approaches for valuing your business during divorce

As a business owner, you certainly know that the value of your company can play an important role in various areas of your business enterprises. As a spouse, you likely also know that the value of your business could play a part in your marital finances and have an impact on settlement outcomes in the event of divorce. When it comes to determining the value of your business, especially in relation to divorce settlements, you certainly want to choose the valuation method that best suits your needs.

Many valuation methods exist, and though you may consider yourself a business-savvy person, you may not have the necessary knowledge or tools to come to an accurate valuation estimate on your own. Often, professional valuators come in to determine business values, and having an accurate estimate may be important during your divorce.

Earning value approaches

One approach that a professional valuator may choose to use in your case can relate to the earning value approach. Different methods of valuation may fall under this approach, but the most common relates to Capitalizing Past Earning. In order to use this method, a valuator would examine your company's past earnings in order to come up with an estimate for expected future cash flow.

Though this approach may seem simple, a number of factors must go into consideration. Any unusual revenue or expenses must be taken into account and normalized, and the valuator must then multiply the expected earnings by a capitalization factor, which indicates the rate of return on investment a purchaser may expect.

Another earning value approach, known as the Discounted Future Earning method, takes similar steps, but rather than using past earning records, it hinges more on predicted future earnings. Once the valuator determines the average future earnings prediction, that amount gets divided by the capitalization factor.

Valuation and divorce

The exact valuation method that works best for your situation can depend on the type of business you own, how long you have been in business, economic factors and numerous other elements. When it comes to determining your company's value, you should remember that valuation for divorce differs from attempting to determine the value for a business transaction.

Because dealing with business assets and other high-value property during divorce can prove complicated, you may wish to become more knowledgeable on options for protecting your assets.

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