Business valuations are required if one or both parties has an operating business

Just like any other asset, if you are operating a business a business valuation must be included in the assets of the community. Unlike other assets like cash, brokerage accounts, and retirement accounts, the value of a business is not located in a statement. Similar to real estate or personal property, an appraisal is needed to support the value.

Business valuations take into consideration the cash flow of business operations, the value of the business assets and debts, risk associated with the cash flow, and the reasonable compensation of the officer or owner. The business valuator must analyze the revenues and expenses for a period of at least five years and determine the most likely cash flow that will continue into the future. A capitalization rate is applied to the ongoing cash flow plus the net value of the assets, and a business value is established.

For business valuation pursuant to divorce, the State of Washington mandates the use of the Fair Value standard

The Fair Value standard differs from the Fair Market Value standard, which implies that a business interest will be sold, allows for discounts for marketability and minority interest, and considers the transferability of the owners’ goodwill to a new owner.

In contrast, the Fair Value standard implies the business will not be sold and the owner will maintain his or her position in the Company. The Fair Value standard does not include discounts for marketability, minority discounts or the transferability of the owner’s goodwill.