The short answer. Through a certified business appraisal by an accredited appraiser (ASA or CVA designation). The appraiser restates owner compensation to market, adds back one-time expenses, adjusts for discretionary owner spending, and applies market multiples. For divorce, valuation date is typically date of separation or filing depending on state law. For estate, date of death. Do not use an operational or sale valuation for these purposes. Legal proceedings require the certified defensibility.
The Legal Requirement
For divorce, a business is often the largest marital asset. Both parties are entitled to a defensible valuation. Courts accept certified business appraisals from accredited appraisers (ASA, CVA, or CBA designations). Courts generally do not accept internal or informal valuations.
For estate, the IRS requires certified valuation for any interest above the annual exclusion. Estate valuations set the tax basis for inheriting parties. An incorrect valuation can produce years of IRS disputes or an inappropriate tax basis for future sale.
In both contexts, the appraisal is a legal document, not an operational one. It must be defensible under cross-examination or IRS audit.
How The Appraisal Works
The appraiser starts with three to five years of financial statements. They restate owner compensation to market, add back one-time expenses, adjust for discretionary spending, and normalize the P&L.
They then apply valuation methods. Discounted cash flow (DCF) for larger businesses. Market multiples (based on comparable transactions) for most SMBs. Asset-based valuation as a floor for asset-heavy businesses.
The final valuation reconciles the methods and produces a single number with defensible support.
For divorce, the appraiser may apply discounts for lack of control (if the party being valued does not have controlling interest) and lack of marketability (private business shares cannot be quickly liquidated). Discounts typically range 10 to 30 percent.
For estate, similar discounts may apply for the specific interest being transferred (fractional ownership, non-controlling stakes).
What The Owner Should Do
Retain your own appraiser. Do not rely on the opposing party's appraiser (in divorce) or the executor's appraiser (in estate). Retain your own credentialed appraiser to produce an independent number.
Provide clean financials. Three to five years of P&L, balance sheet, and tax returns. Contracts, customer lists, and operational documents as requested. The cleaner the financials, the more accurate the valuation.
Do not make operational changes in the valuation window. Restating owner compensation, changing customer concentration, or making major operational shifts during the valuation process undermines the appraisal. Make changes before the valuation date or after the process closes.
Retain a business attorney familiar with the specific context. Divorce and estate valuations have specific legal requirements that vary by state and by federal tax law. A general attorney is not sufficient.
Frequently Asked Questions
Can I use my accountant instead of a certified appraiser?
Not for legal purposes. Accountants can prepare supporting financial documents but they do not produce certified valuations. Courts and the IRS require the appraisal from a credentialed specialist.
How much does a certified business appraisal cost?
Typically $8,000 to $25,000 for an SMB depending on complexity, size, and industry. More for larger businesses or complex ownership structures. Less for very small businesses with simple structures. It is a legal expense, not a discretionary one.
What if my ex-spouse disputes the valuation?
Both parties can retain their own appraisers. Courts will consider multiple appraisals and may appoint a third neutral appraiser. The dispute can extend the timeline and increase legal costs. In most cases, agreeing on a single appraiser upfront saves money and time.
Does the valuation date matter?
Yes, significantly. A business valued at the peak of a growth cycle will value higher than the same business six months later in a downturn. For divorce, date of separation or filing is typical. For estate, date of death. Alternative dates may be argued but generally have less legal standing.