How to handle a valuation dispute during a business divorce

Valuation disputes are a common challenge during a business divorce. These disagreements often occur when partners cannot agree on the value of the business or their respective shares. 

Understanding how these disputes arise and the best strategies to resolve them can help ensure a smoother transition.

Know how disputes can arise

Valuation disputes often stem from differing perspectives on the business’s worth. One party may undervalue the company to reduce a payout. The other might overestimate its value to maximize their compensation. 

Disagreements may also arise over which valuation method to use. Some partners prefer a market-based approach, comparing the business to similar companies that have sold recently. Others may favor an income-based approach, which considers future earnings potential. There is also an asset-based approach, which focuses on tangible and intangible assets.

Financial records or bookkeeping inconsistencies can also cause disputes. Inaccurate records may lead to misunderstandings about the business’s financial health. Additionally, intangible assets, such as goodwill or intellectual property, often become sticking points since their value is harder to quantify.

Address disputes objectively

To address valuation disputes, business owners should start with a clear agreement on the valuation method. Agreeing upfront on how to calculate the business’s worth can reduce arguments later. Seeking a neutral, third-party appraiser to evaluate the company can also provide an objective assessment. An appraiser’s expertise ensures the valuation process considers all factors fairly.

Transparency is another key to resolving disputes. Both parties should disclose all relevant financial information, including debts, assets and income sources. Hiding or misrepresenting information will likely escalate conflicts.

Explore alternative dispute resolution

When disputes persist, alternative dispute resolution methods can help. Many business professionals seek mediation or arbitration in these situations. These methods encourage open communication and negotiation, helping the involved parties reach a compromise without lengthy court battles.

Determining the exact value of a business is a foundational step in going through with a dissolution. It is important to handle the process appropriately, even if disputes arise, to ensure the rest of the business divorce proceeds smoothly.