ARTICLES | Sharing Valuable Insight

Business Valuation: What’s a Business Really Worth?

Business valuation.  How complex can those two words be?  On the surface it would seem that the science of business valuation involves simply applying a formula to a given set of financial data.  A business worth X is always worth X regardless of how you look at it, right?  Not exactly.  In the litigation arena for example, the same business interest may carry different values depending on the purpose of the valuation, applicable case law, and the specific facts and circumstances of the case.  Before a business appraiser can place a value on a business interest, he or she must address several key considerations described below:

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Divorce Valuation: Active vs. Passive Appreciation

In divorce cases, attorneys will often call upon a business valuation expert to distinguish between “active” and “passive” appreciation when deciding how certain spousal assets should be divided and allocated.  The difference is crucial.  A spouse’s interest in a closely-held business often represents the most valuable asset he or she owns and is also often the most complex to value for dissolution purposes, particularly if the spouse owned the business interest prior to marriage.   In most states (including Florida), the active appreciation of a pre-marital asset is includible in the marital estate while passive appreciation is not.  This means that the appreciation in value of the owner-spouse’s active involvement in the business during the marriage is included as a marital asset subject to equitable distribution.  On the other hand, if a pre-marital asset increases in value during the marriage due to external market conditions (passive appreciation), it is excluded from the marital estate and remains the sole property of the owner-spouse.

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Business Valuations: How to Value the “Cow”

Given the many purposes for valuing a business interest and the various entity structures and standards of value involved, it can often be a daunting task for a business appraiser to develop a proper valuation conclusion.  However, most business valuations, regardless of the type of entity, valuation purpose, or ownership characteristics, include one or more of three primary approaches.  Surprisingly the logic and methodology behind these three valuation approaches can also be used to value many other forms of assets including, as we will see, even the farm cow…

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