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3 Types of Company Valuations

3 Types of Company Valuations

3 Types of Company Valuations

If you or your soon-to-be ex owns a company together or you have made a substantial contribution to the value of a company owned by one of you, then it is important to learn how companies are valued. In the beginning, it is not unusual for one spouse to value a company at $10 million while the other spouse may value it at only $5 million. While a spouse may be trying to hide the true company’s worth, you may both be using different valuation methods to arrive at your number. Therefore, it is important to understand the three methods that can be used to place a dollar amount on most businesses.

Enterprise Value

Enterprise value is determined by adding up the market cap of a business or the market capitalization. Then, the debts of the company are subtracted from that number. These debts may include interest due to shareholders and preferred shares. Next, the amount of available cash is subtracted from the number. The resulting number that is often used in figuring Earnings Before Interests, Taxes, Depreciation, and Amortization eliminates the need to consider the cash vs. debt ratio as those are simply financing decisions and do not affect the company’s value.

Equity Value

The equity value of a business shows the owner’s or stockholder’s commonly determined value of the company. This value is determined by taking the enterprise value and adding in the value of stock options, convertible securities, and other assets and liabilities. Since these factors are added, most experts believe that equity value gives a better view of the future profits or losses of a company than enterprise value.

Interest Capital Value

A company’s interest-capital value is very much like its equity value, except that debt is added into the equation. This value is the closest to a company’s true value in most cases as it is the only value that considers both the company’s assets and debt fully.

Why It Matters

Let’s assume for a moment that two people are getting a divorce. After both sides carefully examine the books, the wife says that the company is valued at $7 million while the husband insists the company is valued at only $4 million. The $3 million difference may look like this case is headed for a long court battle. The truth is that because the wife is using enterprise value and the husband is using equity value, the parties may only be $1 million apart. This difference can usually be mediated between the two by an experienced lawyer at a family law practice in Winter Park, Florida.

When you need to settle a divorce, you can count on the team at Frank Family Law Practice to put you in a great position. This team of experts has the experience necessary to lead you through difficult negotiations. Then, you can move on with the rest of your life. Contact them today.