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Pros and cons of market-based business valuation

One way to achieve the American dream is to start a business venture. If you began your business during your marriage or merely used proceeds from the venture to support your family, though, your company may be part of the marital estate. Consequently, your soon-to-be ex-spouse may fight for an equitable share of your business. 

Before addressing ownership of your company during your divorce, you must determine how much the venture is worth. Three valuation methods are popular with spouses who are ending their marriages. If you pick market-based valuation, you should understand its advantages and drawbacks. 

Market-based business valuation

In simple terms, market-based valuation calculates the worth of a business based on how much it would likely fetch on the open market. Rather than looking at other factors, you find recent sales records for similar businesses in your area to draw a meaningful comparison. 

A clear advantage

Market-based valuation is often superior to other valuation methods in one key respect. Rather than making assumptions about future cash flow or other value metrics, you use publicly available data about other business sales. If you are facing a time crunch, this fact may streamline your business valuation. 

One significant disadvantage

Market-based valuation is not perfect. If you have a unique business model or conduct business in an area where there are few similar businesses, market-based valuation may not give you a realistic picture of your company’s worth. The same may be true if no comparable businesses have sold recently in your geographic area. 

If a lack of analogous sales makes market-based valuation seemingly useless, you may not have to walk away from it entirely. As part of your divorce team, a financial professional may help you tweak your market-based valuation model to produce valid information.