How much a business is worth is difficult at the best of times, let alone separation. The objective of business valuation usually is to estimate the “Fair Market Value” of the business, which is a price agreed between a knowledgeable, willing but not anxious seller and a knowledgeable, willing but not anxious buyer.
In a divorce each party usually will have a very different opinion on the value of the business depending on how they might stand to benefit.
A typical method is to look at the profit of the business over a few years and make an educated guess of the likely future profit. This is the “Future Maintainable Earnings” method.
The reality is that Future Maintainable Earnings can’t be proven because it’s an estimate of the future. So, there is room for argument.
The solicitor arguing the valuation is too high will often argue that there is no evidence that anyone would want to buy the business because it relies too much on the owner to keep it afloat. They say that no market value means it’s worth nothing.
The solicitor arguing the valuation is too low will often argue that the business gives “special benefits” to the existing owners that make it worth much more than the financial data or the lack of buyers would indicate. They further argue that what the market would pay for the business is irrelevant because the business is not currently up for sale and probably never will be.
A generally accepted concept has emerged of the Value to the Owner (VTO), not necessarily the market value of the business. As you can imagine this makes the valuation a very subjective exercise as the value to the owner can include those “special benefits” that can be quite intangible and impossible to measure. The spouse retaining the business often is better off with the Future Maintainable Earnings method whereas the other spouse prefers the Value to the Owner method. Compromise is possible of course.
If you are part of a divorce or separation that involves a business, make sure that your solicitor is able to present the side of the argument that suits you, and can also see through any attempt by the other side to pursue a different argument.