Many of our current and former clients are entrepreneurs – owners of small businesses, including restaurants, hair salons, trucking entities, vending services, auto repair shops, construction companies and web design firms. Important to keep in mind that even if the business was started and managed by just one spouse, it may be “marital” in nature. Marital assets are generally subject to an equal division among the parties.
The first step in allocating a business interest involves ascertaining a market value for the entity. It should come as no surprise that business owners typically think their enterprise is worth very little when a spouse comes knocking with divorce papers. That’s when a divorce attorney experienced in complex property valuation and allocation cases can help.
In an effort to combat the difficulty associated with determining the market value of a business interest, one (or sometimes both) parties will retain the services of a qualified business appraiser to evaluate the asset. The best business appraisers are certified in their field, have many years of experience and hold advanced degrees and credentials in accounting. We have ongoing relationships with some of the best appraisers in the Twin Cities.
The cost of a business appraisal varies widely, depending upon the qualifications of the appraiser and the nature of the company being valued. Naturally, the larger the enterprise, the more involved the appraisal will be. Base rates for appraisals of simple sole proprietorships typically range from $4,000 to $6,000.
As part of their valuation, business appraisers will produce a detailed report. These reports become evidence in the case and describe the information gathered by the evaluator, methods utilized to determine value and an ultimate opinion as to the value of the business.
Evaluators will use some, or all, of the following approaches in determining the value of a business:
- Income Approach: Values a business based upon the ability to generate economic benefit for the owners. For example, if a small business is a “high risk” investment, a buyer may wish to realize a return of 20% per year on equity. As a result, the business may be worth five times the profits of the business.
- Asset Approach: Values a business based on a balance sheet of assets less liabilities. Profits are not taken into account, just equipment, inventory and goodwill, offset by debts owed.
- Market Approach: Values a business by comparing historic sales of similar businesses. An evaluator may research recent sales in the marketplace to determine what a willing buyer would pay for the business interest.