Most business valuations in the divorce context are performed upon long-standing businesses. Valuing an early-stage start-up company poses some challenges. In 2013 the AICPA released a guide detailing a framework for assessing the six typical stages of a business’ lifecycle.
Stage 1: The enterprise has no product revenue, limited expense history, incomplete management team, and initial product development.
Stage 2: The enterprise has no product revenue, substantial expense history related to product development, and an awareness for business challenges.
Stage 3: The enterprise has made significant progress in product development, key milestones have been met, and product development is near completion.
Stage 4: Initial sales have been made but the enterprise is still operating at a loss.
Stage 5: Product sales have grown and initial financial success has been attained with positive cash flows and profits.
Stage 6: The enterprise has an established financial history of profitable operations.
Most business valuations are performed on a mature company well into Stage 6. But when valuing an early stage company, there will not be historical data to consider. Some indicators of value apart from traditional financial data includes: the company’s business plan, correspondence with investors, financial forecasts, management’s history of success in other companies, market studies and surveys, interviews with management, expected pricing model, and what are the unknown factors that will affect value. Additionally, understanding the non-traditional methods of compensation that could affect a particular owner or investor’s value is important. For example, in some industries, it is common to offer stock options to investors in early stages which can dilute the ownership of current stockholders in the future.
Having a financial expert skilled and knowledgeable in valuing early-stage entities is important to presenting the client’s best position in the divorce case. An unfamiliar expert may over or under value such an entity and cause a problem for the client in the division of property.
Hat tip to David Witherspoon’s article Valuing an Early Stage Company in Marital Dissolution from Family Lawyer Magazine.