The Family Court employs the following organized methods of valuation of a business for property settlement purposes:
This methodology is appropriate for valuing a minority interest in a business. A person with a minority interest in a business has no control or influence power but has the right to receive dividends. This methodology is not frequently applied to the valuation of shares in private companies because private companies invariably have inconsistent earning patterns which are often affected by tax consequences. If this methodology is applied it must be with a business which has earnings that have been relatively consistent over the years.
This methodology is appropriate for businesses that allow for fluctuations in the future performance of the business and those that have a known lifespan like if it has a fixed term contract. To put it simply, this methodology reduces the future amount of income by taking into account inflation in order to obtain the present worth of the business in dollars.
The value of the business that is derived is the total of all future income that the business will produce in today’s dollars. To be able to determine the present worth of the income of the business, a reliable cash flow projection is required. For smaller business, a cash flow projection beyond 12 months is usually not prepared. The discount in cash flow approach is not generally applied in family law property settlement proceedings.
This method is appropriate in valuing a controlling interest in an ongoing business. The business must have a history of consistent income from which future profit can be based. The methodology requires a determination of the future maintainable earnings of the business and consideration of the factors that would most likely affect the future operation of the business; identification of profits and losses that arise from a surplus of assets; and selection of appropriate earning multiple with regard to the market rating of comparable businesses.
This methodology is used where a business is not making profits or the cash flow yield is less than that which could be earned if the assets of the business were sold and the proceeds of the sale is invested. The value of the business is simply the result of all the assets added and the liabilities deducted. The assets should be valued as if they were disposed in an orderly fashion and not as if in a fire sale.