As family lawyers, we are frequently asked to determine the valuation of a company. The value of companies, especially early-stage companies can become a large part of divorce proceedings for founders and large shareholders of companies. In some cases, the stock may even represent the most valuable financial asset in the marriage. Therefore, the family lawyer you choose must have knowledge on how to handle this process and know when an appraiser is needed.
Stages of a Company
The American Institute of Certified Public Accountants (“AICPA”) released a guide in 2013 that breaks down the typical stages of a business. The guide sets out six stages, which are set forth below:
1. The business has no revenue and only a few employees.
2. Still no product revenue, but there is not a substantial expense history.
3. Product development has made significant strides, important milestones have been hit, and the product is almost ready to be sold.
4. Sales have been made, but there have not been profits.
5. Product sales have led to profits.
6. The business has stayed profitable for a significant amount of time.
Those companies in stage six are generally much easier to value than those companies in stage one.
Typically, an attorney will not be equipped to professionally analyze the stage of the company and then value it, nor would he or she be unbiased. Therefore, at this stage, it is important for your attorney to hire the right expert witness. The witness should be trained and familiar with popular valuation methods.
Once the expert has the necessary information, he or she evaluates based on Virginia’s standard for divorce litigation, which is the intrinsic value of the company. There is no specific definition for intrinsic value, but what it is usually not is just the basic value of the company if it was put on the market. Evaluators must pick the best valuation method for the situation and apply it.
Three popular evaluation methods are excess earnings approach, the asset valuation approach, and the market value approach. The best evaluators take into account all factors that could increase or decrease the value of a business. In an early-stage company there will not be much of a financial history, so evaluators in this area look at more creative measures of value like: the company’s business plan, financial forecasts, market studies, and unknowns.
Capital Structure Values
The capital structure value must also be analyzed for a complete valuation. The three main ways to calculate capital structure value are equity value, enterprise value and invested capital value. It is common for different experts to use different methods to calculate capital structure values, which can cause discrepancies in the overall valuations. These discrepancies can cause issues when the sides come to negotiate and nobody understands why they are so different, making it hard to come to a deal. Therefore, having an attorney and expert that understand how the different capital structure values can be obtained will lead to more successful negotiations.
Using the Right Lawyer
If you are in need of a lawyer for your divorce proceeding, or if you have any other family law or estate related needs, or would like to attend one of our free seminars please call Smith Strong today at (804) 325-1245 or (757) 941-4298.
By: Van Smith
Editorial Assistance By: Michael Gee - Law Clerk