Business valuation in Michigan divorce cases
Most businesses, small and large, have value and Michigan divorce property law requires a fair division of all property acquired by reason of the marriage.
It does not matter if the business was started during the course of the marriage or merely increased in value during the course of the marriage for the value of a business to be subject to division in a divorce.
- Business valuation in Michigan explained – The different types of “value” of a business.
- Business valuation methods explained – How to determine the “value” of a business.
Business valuation in Michigan explained – The different types of value.
Determining the value of a business in a Michigan divorce can be complicated and expensive. Many business valuations require the expertise of certified valuation experts and accountants. It is important to understand that the value of business can change simply by utilizing different definitions of value or different methods of value.
To understand how to value a business in divorce we will start with definitions of value of a business.
Book value
The book value of a business is the value as entered in the companies books and tax returns.
Fair Market Value
The first definition of value of a business is Fair Market Value (FMV). FMV is the value that a willing buyer and a willing seller will pay for the business. Simply put, the value of a business is what someone will pay for it. However, not every business in a divorce case can or should be sold.
Fair Value
The second definition of value of a business is Fair Value. Fair Value applies when there is a shareholder agreement which provides for a contracted buy-out of the shareholders interest. However, not every business has shareholders and a shareholder buy-out provision.
Investment Value
The third definition of value of a business is Investment Value. Investment Value is the value of the business as an investment. If the business pays a dividend, rent or other return on investment. The return of investment is the Investment Value. However, not every business has a return on investment.
Holder’s Interest Value
The fourth definition of value of a business is Holder’s Interest Value. Holder’s Interest Value is measures the amount of money the business makes as an investment to the current owner. This definition of value of a business presumes that the current owner of the business will continue to own the business.
Business valuation in Michigan explained – How to determine value.
The method used to calculate the value of a business can make a big difference in determining the value. For example, a business “Book value” is typically substantially less than a business valued using a “Holder’s interest” valuation. Here is a summary of business valuation methods:
Book value
The Book value is determined by looking at what is reported in the companies tax returns and books.
Fair Market value methodology
The Fair Market value of a business involves researching what similar businesses sell for and estimate what a willing buyer and a willing seller will pay for the business. The valuation methodology is dependent on a willing buyer and seller. However not all businesses can be sold on the open market.
Fair value methodology
The Fair value is determined by a shareholder agreement. The shareholder agreement provides for a contracted buy-out of a shareholders interest. However, not every business has shareholders and a shareholder buy-out provision.
Investment value methodology
The Investment value is the value to a specific buyer as an investment. This valuation method can be very complicated depending upon the business and the investor. For example, a business that pays a dividend, rent or other return on investment has value. A business with tax credits or losses may also have value to the right investor. The return on the investment to the buyer is the Investment Value. However, not every business has a return on investment.
Holder’s Interest value methodology
The Holder’s Interest value is measures the amount of money the business makes as an investment to the current owner. The idea is that the current owner of the business will continue to own and hopefully grow the business. This valuation method recognizes that a business owner going through a divorce will not be selling the business and will continue to receive the value of the business in the future.