Often in divorces, a spouse or both spouses may own a closely-held business. While the business itself may not be divisible in the divorce, the value of the business entity as an asset of the marital estate can be an important component to the division. There are several considerations at play when valuing a business entity for divorce purposes.
The first question is the gross entity value. This considers the total capital structure or the overall value of the operations without considering the impact of the cash and debt being carried. Investment bankers consider this value in determining EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and revenue-based multiples. Basically, for the gross value purposes, the debt and cash are operational decisions and not relevant to gross value. Included in this consideration are the gross revenue figures, as well as asset values and intangible values such as entity goodwill and workforce in place.
The next consideration is the equity value. This involves the netting of the debt against the gross entity value.
Valuation of an entity for investment or purchase purposes differs from valuation in the divorce context. Investment considerations primarily use the gross entity value. On the other hand, for purposes of the divorce context, the net equity value is the appropriate measure. Most often, this is not a value that can be simply and easily calculated without the assistance of an expert in divorce valuation issues. The method of applying discounts to the gross entity value for lack of marketability or reputation of the individual owner are areas for much disagreement and will require expert testimony in most scenarios.
Hat tip to Sean Saari and his article All Company Values Are Not Created Equal in Family Lawyer Magazine.