Valuing a Business in a Texas Divorce, Part Two

Valuing a Business in a Texas Divorce

Divorces are hard. Divorces with businesses are more complex. Valuing a business owned by you and your spouse can be just as hard. In this series of blog posts from the attorneys with the Law Office of Bryan Fagan, PLLC, we would like to share some information for any person in our community that is considering a divorce or finds themselves being forced to consider divorce as their spouse has recently filed a divorce petition.

It is always wise to consult with and hire an attorney in conjunction with a divorce, but we hope this information will provide you with background knowledge to utilize once your divorce begins.

An Appraiser Will Need to Discount the Value of the Business by the Percentage That a Spouse Owns

Suppose that in your divorce case, an appraiser is hired (usually, someone whose job title is as a forensic accountant). That appraiser determines your business is worth one million dollars. You also own a 40% share in the business.

Because you are known as a minority shareholder, the value of your business would have to be reduced. This is because your interest is not marketable as the business as a whole would be. If your ownership percentage is measured in shares of stock, you cannot just go out into the marketplace and sell privately held shares of stock in a relatively small company.

On the other hand, suppose that you own 75% of a company as a shareholder. This changes the equation dramatically. The reason is that in Texas, a minority shareholder in a company does not possess many rights. As someone that owns 75% of the shares in a company, you own a controlling interest in the company, and a percentage would not reduce the value of your business in that situation.

Often, owning a minority interest reduces your share of the overall business by a certain percentage for marketability purposes. The hit the value takes over your only owning a minority share of the stock in the company.

Buy-Sell Agreements Explained

Valuing a Business in a Texas Divorce

If you’re a co-owner in a small business, you’ve likely signed a buy-sell agreement. This stipulates that in events like death, resignation, dismissal, or divorce, the company repurchases your shares at a pre-determined price.

These agreements significantly influence your business interest’s valuation. Key considerations in such scenarios include:

  • Is your business a partnership or corporation?
  • Does the signed agreement cover divorce situations, or is it limited to other scenarios like death or departure?
  • Consider a hypothetical example: You’re a doctor owning a quarter of a medical practice, having bought 20,000 shares at $1 each. Alongside this purchase, there’s a shareholders agreement, also signed by your spouse, dictating that in case of a divorce, you must sell your shares back at the original price.

What if you or your spouse didn’t sign this agreement? How would a court rule? Are you subject to agreements signed by other partners? In Texas, recent rulings indicate that the initial stock purchase agreement validates the shareholder’s agreement in divorce cases.

Consequently, your shares would be valued at $20,000, the price in the shareholder’s agreement, not its current or book value. The valuation won’t reflect the fair market value (the price a knowledgeable buyer and seller would agree upon) but strictly the stipulated amount in the agreement.

Is There a Non-compete Clause in Place for the Spouse Who Owns the Business?

In divorce cases, courts assume that leaving a business also means taking your professional reputation with you. Therefore, personal goodwill doesn’t add value to your business. Your presence in the business is temporary, as evidenced by the divorce. If the business is to be sold, a buyer’s interest may diminish without your esteemed reputation.

Key considerations arise: What if you open a competing business? This scenario could devalue your old business. How does an appraiser factor in this potential competition?

The answer hinges on a non-compete agreement. Without it, it’s assumed that after selling your business interest, you can compete, potentially lowering your old business’s value. The extent of the impact depends on how much your goodwill contributed to the business.

Conversely, a non-compete clause can increase the business’s value during appraisal, as it eliminates the risk of immediate competition.

Regarding judicial intervention, a judge can’t order a non-compete in a divorce. Therefore, if your spouse sells their business interest, you can’t presume they won’t compete. This uncertainty can affect the business’s valuation in divorce proceedings.

Final Thoughts

Valuing a Business in a Texas Divorce

In conclusion, valuing a business in a Texas divorce involves complex considerations, particularly around personal goodwill, competition potential, and non-compete agreements. Understanding these nuances is crucial for a fair and accurate appraisal of the business’s worth, ensuring equitable outcomes in the divorce proceedings.


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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.