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Income, asset and market approaches for business valuation in divorce

On Behalf of | Nov 2, 2023 | Divorce

Business valuations are important in Connecticut divorces. For example, assessing the value of a business helps with asset distribution.

The income approach, asset approach and market approach can play roles in valuations, as can hybrid variations.

The income approach

The income approach focuses on the future earnings potential of the business. It assumes an intrinsic link between a business’s value and its capacity to generate profits.

The capitalization of earnings method calculates the business’s value by dividing projected earnings by a capitalization rate. It reflects the business’s risk and establishes the present value of future earnings.

The discounted cash flow method estimates the business’s future cash flows and discounts them to their present value. It provides a comprehensive analysis but requires an accurate projection of future cash flows and the selection of an appropriate discount rate.

The asset approach

This approach, particularly relevant in cases involving tangible assets or potential liquidation, determines the business’s value based on its underlying assets. Book value computes the business’s worth by subtracting liabilities from assets, typically using historical cost accounting. It is a straightforward method but may not reflect the actual market value of assets.

The adjusted net asset value approach adjusts the book value of assets to their fair market value, accounting for asset appreciation and intangible assets, such as intellectual property.

The market approach

Small businesses are important in Connecticut, making up 99.4% of businesses in the state. The market approach in Connecticut divorce business valuation involves comparing the business to similar entities in the market. This method operates on the premise that what others are willing to pay for similar businesses determines a business’s value.

The market comparable sales method analyzes recent sales of comparable companies. The guideline public company approach uses data from publicly traded companies in the same industry to evaluate the privately owned business’s value. It offers insights into market trends and industry-specific multiples.

Hybrid variations

Hybrid valuation methods provide a more comprehensive view. These methods are particularly useful when a business has unique characteristics that standard approaches may not fully capture.

When it comes to divorce in Connecticut and business valuation, a careful and thorough evaluation is necessary for the distribution of assets. A range of valuations and tools are available based on the characteristics and circumstances of the business.