Dividing property is one of the most important and potentially contentious aspects of business partners falling out and going their separate ways. A business divorce requires that the company be fairly valued so that all or part of it can be sold, whether to insiders or to outside buyers.
A business valuation analyzes all areas of the company to determine the worth of its various departments and of the entity as a whole. Professional evaluators look at such as elements as the company’s capital structure, its management, the market value of its assets and its future earnings potential.
There are numerous ways to value a company during business divorces. Some of the most common methods are:
- Market capitalization — The value of a public company typically is calculated by multiplying the company’s share price by the number of shares outstanding. If the price is $50 and there are one million shares outstanding, the company’s value is $50 million.
- Times revenue — A multiplier is applied to the revenue the company has generated over a certain time period. The multiplier varies by industry. A tech company might be valued at 5x revenue while a service company might be valued at 1x revenue.
- Earnings multiplier —The company’s price-to-earnings ratio is adjusted to account for current interest rates. This is often more accurate than the times revenue method because the earnings multiplier is based on profits.
- Discounted cash flow — This is similar to the earnings multiplier method, except that the company’s cash flow is calculated taking inflation and other market risks into account.
- Book value — This is the company’s total assets minus its total liabilities as shown on its balance sheet.
- Discretionary earnings — This method, often used for valuing small businesses, takes gross earnings and adjusts them for depreciation, interest expense and non-operating and non-recurring income.
When business owners are engaged in a split up, it is to be expected that the choice of valuation method will be a point of contention. Different owners will likely choose their own evaluators, with each employing a different method. If the owners can’t agree on a selling price, some form of alternative dispute resolution, such as mediation, may be used to arrive at a settlement.
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