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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 discuss today is not easy to understand and is not the most thrilling material to discuss.

I get that. Valuing your business, or your spouse's business, is not going to tug on your heartstrings 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 essential to understand the factors involved in valuing that business in your divorce.

So my advice is to stick with me over the next day and 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 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 need 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 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 appraise the value of your business accurately. 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.

You and your attorney 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 it comes down to each spouse hiring their 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 than 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 essential 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 your company's financial statements to determine if it is necessary to adjust them. "Normalizing" the statements is what this process is.

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

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

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 will look inside and outside the home to determine 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 reasonably 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 they find 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 is 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 appraiser's analysis. 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 is that for many service sector businesses, the tangible property of your business is likely relatively 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 specific 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. This method seeks to figure out how much money an investor would need to dedicate to a business to turn a profit.

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.

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

Before hiring an appraiser, you should take these steps.

Before deciding to work with a particular appraiser, you and your attorney should ask for that appraiser's references and check in with other attorneys in the family law field to see what their 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 they are charging, then it is your prerogative to go with a different appraiser.

Finally, your judge may have an appraiser that they particularly like or mainly do not like their methods. It pays to have your attorney ask their peers what their experiences working with a particular appraiser have 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, PLLC.

Thank you for your time and attention as we discussed many important issues related to valuing your business in a divorce case. The critical 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, PLLC, 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 effect on Golden Years Divorces
  5. What happens to your business in a Texas Divorce?
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Law Office of Bryan Fagan, PLLC | Business Owner Divorce Lawyer

The Law Office of Bryan Fagan, PLLC, routinely handles matters that affect children and families. If you have questions regarding Business Owner Divorce Lawyer, it's essential 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 the Law Office of Bryan Fagan, PLLC by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan, PLLC, 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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