What is market-based business valuation?

On Behalf of | Jun 27, 2021 | Divorce

If you are planning to end your marriage, you may already know you must divide the marital estate. This may include your home, investment accounts, cash, furniture and other items. If you own a business, you may also need to address ownership of the venture during your divorce.

While you may have some options for securing exclusive ownership of your company, planning for your divorce should include a business valuation. Although there are other valuation methods, divorcing spouses often choose market-based valuation.

How does market-based valuation work?

According to Eqvista, a firm that makes equity management software, market-based valuation seeks to determine how much your business would likely fetch on the open market. To estimate your company’s worth, you must consider market forces, such as the sales prices of comparable businesses in your area.

When is market-based valuation appropriate?

Market-based valuation may give you a realistic picture of your company’s worth without having to perform complex revenue forecasting. If you purchased the business recently, you probably know how much you paid for it. On the other hand, if your company has similar competitors, you may be able to get your hands on publically available information about recent sales.

What keeps market-based valuation from working?

Market-based valuation does not always work. If your business is in a remote area or performs a one-of-a-kind service, it may be difficult to find reliable market data. Likewise, if your company is set to increase profits in the coming months or years, your soon-to-be ex-spouse may object to market-based valuation.

Ultimately, you probably want to choose the valuation method that most benefits you. If that is not market-based valuation, you may want to explore asset-based or income-based valuation. Either way, putting an experienced financial professional on your divorce team may make a great deal of sense.