Methods for Valuing a Business in a Texas divorce

Let’s get one thing established at the outset of today’s blog post. Some of the subject matter that we will be discussing today is not easy to understand and is not the most thrilling material to discuss, either.

I get that. Valuing your business, or your spouse’s business, is not going to tug on your heart-strings like discussing your children and the issues surrounding them. Nor should it. However, I do believe that if your case does involve a business that either you or your spouse own that it is important to understand the factors involved in valuing that business in your divorce.

So my advice is to stick with me over the next day or so and to go through each blog post with the idea that if you learn something today you can help yourself down the road in your divorce. Ordinarily, you would have no way to really know any of this information since much of it is not common sense and the people in your life who have divorced may not have businesses that needed to be divided. With that said, let’s get into our discussion on valuing a business.

Is there an accurate method for valuing a business?

The short answer to provide to that question is- not really, no. If you go online you can read dozens if not hundreds of articles on this subject and come away still not knowing how to accurately appraise the value of your business. If you employ fifteen different appraisers to come into your business and assign it a value you will likely come out of your divorce with fifteen different values.

Your attorney and you are best off to use a forensic accountant who will not cost an arm and a leg, and one that has experience in valuing businesses within the context of a divorce.

Often times it comes down to each spouse hiring their own appraiser and a battle between the attorneys to cross-examine each expert about their methods for valuing the business. Being able to show that there are other methods available that are likely more accurate that should have been applied is what your attorney is likely to argue.

Step One to valuing a business: Collect Documentation

Regardless of what valuation method you are utilizing the first step in the process is to collect basic documents and information that can assist in the initial analysis of the business. Along with this step, the appraiser will likely take a look at the financial statements of your company to determine if it is necessary to adjust them. “Normalizing” the statements is what this process is.

For example, if the balance sheet of your company shows an unrealistic value of your company’s building.

This can obviously have a tremendous effect on the overall value of what you believe the business to be worth and what it is actually worth. Also, if you have been listing personal expenses under the heading of business expenses then your own valuation of the business is probably off there as well.

Applying various methods to value your business

Once the books are reviewed and the “true” numbers are shown, your appraiser will have to choose a method to value your business and then do so. If you are selling your home, an appraiser would do a look through inside and outside the home to determine if there are any defects in the property.

Next, the appraiser would do a comparative market analysis comparing your home against other, similar homes in your area. Once this is done a value of your can be ascertained.

This is a fairly well-established practice and is understood by most adults in our country. As a result, your appraiser may end up selecting a similar method to value your business.

Your appraiser could do the research necessary to determine what businesses similar to yours have sold for recently. If he or she finds out a shareholder in a similar business sold her 10% stake in the business for $20,000, then it would follow that your 50% stake in your own business would be worth $100,000.

Other methods of valuing a business that are utilized frequently in Texas divorces are as follow:

-Adjusted book value. Whatever the tangible assets of your business are, they would be appraised and shown at market value in the analysis of the appraiser. Once the liabilities of your business are subtracted from that number you would then have an adjusted book value for your business.

As we have discussed in an earlier blog post on this subject, the adjusted book value of a business tends to undervalue rather than overvalue a firm. The reason being is that for many service sector businesses, the tangible property of your business is likely quite low.

-Income approach. There is a concept in business that the money that an investor pays for a business depends on the amount of money that the investor will receive over a certain time period as a function of their being an owner in the business. Any approach to valuing a business that takes income as its primary consideration will look at how much income is likely to be created by the business in the future. Determining how much money an investor would need to dedicate to a business in order to turn a profit is what this method seeks to figure out.

What standards are in place when determining the value of a business?

Forensic accountants that act as appraisers and expert witnesses in divorce cases are bound by standards set forth by the professional association that Certified Public Accountants adhere to.

If your spouse’s appraiser does not appear to have stuck to the tenets of these standards then you may be able to make a challenge to the reliability of that appraiser’s testimony in court and their valuation as a whole.

Prior to hiring an appraiser, you should take these steps

Before deciding to work with a certain appraiser, you and your attorney should ask for that appraiser’s references and also check in with other attorneys in the family law field to see what his or her reputation is. If your appraiser does good work but struggles within court testimony and explaining the results of their study then you will be at a disadvantage.

As we already talked about, different appraisers charge differing sums of money for working on your case. If you are not comfortable with the amount of money that he or she is charging then it is your prerogative to go with a different appraiser.

Finally, your judge may have an appraiser that he or she particular likes or particularly does not like their methods. It pays to have your attorney ask their peers what their experiences working with a particular appraiser has been like. If their response is to talk about how their judge would roll their eyes each time the appraiser spoke in court you may have a sign that you need to consider hiring a different appraiser.

Questions on valuing your small business in your divorce? Contact the Law Office of Bryan Fagan.

Thank you for time and attention as we discussed many important issues related to valuing your business in a divorce case. The important issues of your case (and there will be many) require consistent thought and effort in order so that you are prepared for the rigors of a possibly contested divorce.

If you have questions about any of the material you read today please consider contacting the Law Office of Bryan Fagan today. Our licensed family law attorneys are available six days a week to speak to you in a free of charge consultation. We serve families across southeast Texas and would be honored to do the same for you and yours.

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Other Articles you may be interested in:

  1. Valuing a business in a Texas divorce, Part Two
  2. Valuing a business in a Texas Divorce
  3. Business owners should be aware of the following tips to prepare for a divorce in Texas
  4. High asset divorces and their affect on Golden Years Divorces
  5. What happens to your business in a Texas Divorce?
  6. How to handle a high net-worth divorce in Texas
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  13. When is, Cheating Considered Adultery in a Texas Divorce?
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Law Office of Bryan Fagan | Business Owner Divorce Lawyer

The Law Office of Bryan Fagan routinely handles matters that affect children and families. If you have questions regarding Business Owner Divorce Lawyer, it's important to speak with a Business Owner Divorce right away to protect your rights.

A Business Owner Divorce Lawyer is skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact Law Office of Bryan Fagan by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan handles Divorce cases in Spring, Texas, Cypress, Spring, Klein, Humble, Kingwood, Tomball, The Woodlands, Houston, the FM 1960 area, or surrounding areas, including Harris County, Montgomery County, Liberty County, Chambers County, Galveston County, Brazoria County, Fort Bend County and Waller County.

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