Determining the accurate value of a business can be complex, but it can be critically important in a variety of situations — including when determining property settlements in a divorce and when dissolving a partnership or LLC. MLG Law Group is a Chicago-based law firm that is committed to helping clients obtain fair valuations.
Understanding Business Valuations
A business’s valuation is simply an estimate of its worth. Put another way, it’s the price a reasonable buyer would pay for the business’s cash on hand and future cash flows, minus its debt.
Determining an accurate valuation, however, is anything but simple. Factors considered include the company’s projected future earnings, capital funding structure, current market value of company assets, the strength of the company’s leadership team, what’s going on in the market, pending litigation or regulatory issues, and more.
There are many methods to calculate valuation, including the discounted cash flow (DCF) method, the benchmark multiples method, and the comparable transactions method. There are positives and potential drawbacks associated with each method. There’s not a single “best” method for valuation that applies universally to all businesses.
- Discounted Cash Flow Method: With the DCF method, the company providing business valuation and appraisal services estimates the business’s estimated future cash flows — evaluating earnings and assets, before applying a discount rate.
- Benchmark Multiples Method: Using the benchmark multiples method (also sometimes called the market multiples method), valuation analysis starts by calculating a ratio between two of the company’s variable numbers. That ratio is then compared to the business’s peers or competitors and analyzed.
- Comparable Transactions Method: This method involves reviewing benchmark data comparing the earnings before interest, taxes, depreciation and amortization (EBITDA) for benchmark companies and using the results to determine high, low and mean valuation numbers.
When Are Valuations Necessary?
Business valuations can play a key role in a variety of transactions:
If you and your spouse own a business together, or if one of you holds an interest in a business, you probably don’t need to know what the business is worth on a day-to-day basis. However, if your marriage is ending, obtaining accurate business valuations in a divorce should be viewed as a necessary step, as it can help ensure you receive a fair settlement.
Dissolution of a Business
Much like ending a marriage, dissolving a business partnership involves valuing assets. Business valuation services can help guarantee accurate financial and tax reporting. If the business being dissolved is insolvent, the business valuation process will also be important in bankruptcy proceedings.
When an estate plan includes transferring a business, obtaining a business appraisal based on the date of the business owner’s death can help avoid potential issues with the IRS and state tax authorities. This limits the risk that business assets will be considered undervalued on estate tax returns.
Business valuations may also help with ongoing management of the business, financing transactions, buy-sell agreements, tax reporting, financial reporting, derivatives, shareholder disputes, fraud litigation and more.
Choose MLG Law Group for Business Valuation Services in the Chicago Area
Whether you need to determine the value of your business as part of your divorce or need a business valuation audit for a pending business sale or dissolution, the hardworking legal professionals at MLG Law Group can help.
To learn more, and to schedule an initial consultation with a skilled business valuation lawyer, contact us today online or call 312-374-4559. With convenient office locations in the Chicago Loop, DuPage (Warrenville) and on the Southside, we serve the greater Chicagoland area.