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Valuation of a Company for Divorce

In a Texas divorce, business valuation can emerge as a complex issue, particularly when it involves closely held or small businesses. While not overshadowing concerns about custody or visitation rights for your children, safeguarding the assets of a business you’ve invested time and effort into building is crucial. Depending on various factors, you and your spouse may need to decide on valuing the business, dividing its assets, selling it, or determining its ongoing operation.

Many people overlook the importance of considering various factors when determining how to sell their business. These factors include the value derived from the physical facility, the book value represented by inventory, machinery, and tools, and the goodwill associated with the business name and community reputation. While some of these assets are easier to value than others, each contributes to the overall worth of the business. For example, it is easier to determine the value of a 5-year-old riding lawn mower than it is to determine the value of the business’s name in your community.

How are businesses dealt with in Texas divorce cases?

At least from this standpoint, the method of disposing of a business in a Texas divorce is pretty simple. If you and your spouse want to split up the business, then you only have two options. The first option would be to sell the business to a third party who purchases businesses like yours and then sells off the component pieces or attempts to assemble a management team and run the business him or herself. The other option would be to buy out your spouse’s ownership in the business or vice versa. To do so, there must be available cash on hand, or you must have Community property or other assets available to trade.

Determining ownership of business assets in Texas divorce proceedings

In this scenario, the first question that we have to ask ourselves is to determine which of you owns what portion of the business. Keep in mind that Texas is a Community property state. This implies that assets acquired during the marriage are eligible for division in the divorce proceedings. In contrast, property acquired by either spouse before the marriage remains separate and is not subject to division during the divorce. However, things like profit from that separate property may be divisible. For our discussion today, we need to figure out 1st of all whether or not your business is part of the community estate state or as part of one of your separate estates.

We need to ascertain whether the business was acquired before the marriage or with separate property funds during the marriage. The other alternative would be that you or your spouse could have started your business before your marriage. Therefore, it would be classified as separate property and in a pretty straightforward manner.

Community property and business ownership in Texas divorce

As mentioned earlier, even if your business commenced before your marriage, there could still be aspects of the business considered community property. For instance, if your spouse contributed time, community funds, or other business elements, their contributions may be Community property and subject to division in your divorce. Additionally, if your business has increased in value throughout your marriage, those value increases may also be Community property. Finally, any contributions made by you and your spouse during the marriage using community funds, such as renovations to the office or building housing your business, also constitute part of the community estate.

What is not especially relevant is whether or not you consider yourself the owner of the business or if your spouse considers herself the owner of the business. While the actual work performed within the business may hold significance in certain aspects, the primary factor to consider is the timing and nature of the funds invested in the business. Establishing the business’s start date, identifying the source of the initial funds for its establishment, and determining which funds were used for its growth and investment during the marriage are crucial steps. To me, these are the most important questions that we need to ask ourselves.

What is the value of the business? How do we decide on value?

Hiring a professional to appraise or value your business is an important and difficult task. Even if you have a rough estimate or idea of what your business is worth or what someone else has told you that your business is worth, it is wise to hire a professional business valuator or appraiser as a part of your legal team. Being able to sift through the financial documents, tax returns, state laws on valuing businesses, and knowing enough about Community property would be 4 characteristics that I would look for in a professional business appraiser.

Valuing your business in divorce: expert insights

Between the appraiser and your attorney, you will have in place what you need to present an accurate and fair evaluation of your business for your divorce. However, keep in mind that your spouse will likely have the same team of her own, consisting of different people. Oftentimes the valuation question comes down to the two experts on businesses competing to show why their valuation is more accurate.

Different people could arrive at different values for your business because there are different methods of valuing a business. The first method is called the asset approach. In my opinion, this is the most straightforward method of valuing a business because what you do is take the assets of your business, subtract the liabilities of the business, and arrive at a value. Keep in mind that we’re talking about things that you can put your hands on and things that are more financial or theoretical for both assets and liabilities. Deaths would be an example of an intangible liability, while equity in the land underneath your business would be an example of an intangible asset.

Business valuation methods in divorce

Next, we could explore the market method of valuing a business, which, in my experience, is the most commonly used approach. This method is particularly effective for businesses like restaurants, landscaping firms, accounting offices, or other common businesses that have seen numerous sales in your area recently. The value of your business estimate is greatly influenced by the selling prices of similar businesses. Think of it akin to how a real estate agent uses market analysis to determine a house’s selling price, or how an appraiser assesses a home’s value.

Finally, we need to talk about the income valuation method. This is a much more theoretical approach to valuing your small business because you would take the expected gains to value it in the current day. You would project profits and cash flow into the future, leveraging business trends to formulate a prospectus outlining the estimated value of your business upon finalization of your divorce or at a specified future date.

What is the goodwill value of your business, and how will it impact the bottom line?

To determine the goodwill value of your business, you must first be able to determine the overall business is value. The goodwill value of your business is determined by subtracting tangible assets from the overall business value. These assets, which we are concerned with here, are intangible and physically present, used in the operation of the business. The difference between these two numbers would be the goodwill value of your business.

Once we determine this number, we can get even more nitty-gritty when determining goodwill value. The reason why is that in Texas, divorce is typical; there is business associated goodwill in personal goodwill. The goodwill associated with your business has more to do with the business’s goodwill in your community. This means that what people in your immediate area and what your clients think about your business matters in terms of this method of valuation.

On the other hand, the personal goodwill of your business has more to do with you or your spouse and your role in operating the business. For example, if you have grown your business in the past decade to be a pillar in the community and you have done things like donated money to charity on a high level, sponsored Little League baseball teams, and generally made a positive name for yourself, then there is a great deal of personal goodwill inherent in the value of your business. I like to call this a “soft factor” in evaluating the business valuation because it is difficult to put a specific dollar amount to this factor. Still, at the same time, it is important, nonetheless.

What could happen to your business in your divorce?

Now that we have talked a little bit about the valuation process that could be a part of your divorce regarding your small business, the next logical question would be what could happen in the divorce as far as your business is concerned. In divorce cases, most issues are usually resolved through negotiation rather than trial. Valuing the business and negotiating its division may require multiple attempts, but the case is likely to be resolved through mediation rather than trial.

Navigating business valuation and goals in divorce

Ultimately, it would help if you determined what you want to see happen with your business. The reality of a divorce is that what you want to happen may not occur exactly as you see it occurring, but you nonetheless need to have goal sessions with your attorney. That way, your lawyer can communicate your positions effectively in settlement negotiations with your spouse. With so many moving pieces that are a part of this process, it can be easy to lose information in the shuffle. You and your attorney need to be on the same page regarding the valuation question and goals for the divorce in a possible division of the small business.

It is worthwhile to consider whether or not you run the business, whether your spouse does, or if you all run it as a team. This will be a relevant consideration because if only one of you operates the business, it is possible that simply buying out the other non-operating spouse’s interests may be the most logical thing to do. If both of you actively participate in the business and neither wants to run it separately, then selling the business and dividing the profits may be the most prudent option.

Deciding on business sale in divorce

Whether or not to sell a business in a divorce is similar in many ways to the decision of whether or not to sell a home as the result of a divorce. Whether or not it is practical, whether or not you all can run a business separately, are relevant questions to ask. If you rely upon the other a great deal to operate the business, it may be best to divide the business, sell it and then use the funds to pay down debt or even open a new business once the divorce is over.

What sort of money is available to buy your spouse out of their share in the business? This is a question that many people in your shoes run into in the valuation process. If you and your spouse conclude that you all should buy out your spouse’s share in the business, you must figure out how to make her whole. Either awarding her a similar amount of community property or creating an agreement where you pay her a certain amount of profit over five or ten years, maybe ideas for you to ponder.

What can you do to prepare for a divorce where a small business?

As a small business owner, you know the importance of preparation and planning. Without a game plan, a divorce can quickly become complicated. It’s crucial to decide early on what you want to do with your business and discuss options with your spouse. Aligning on a rough agreement beforehand can streamline the divorce process.

Next, you should consider finding a divorce attorney who is not only a specialist in Texas family law it has also handled business owner divorces previously. If we apply never handled divorce before, you won’t hire him, would you? By the same token, if the attorney had never handled business, almost divorce, you probably should not put your largest asset into that person’s hands. To learn as much as you can about this attorney, you should sit down and interview them before signing the contract. Ask specific questions about how I would approach the situation and what advice he would potentially have in mind.

In a Texas divorce, it’s essential to collaborate with your attorney to find a reliable and qualified appraiser specializing in local business valuation, a crucial step if your business is part of the divorce proceedings. Your attorney may recommend potential appraisers, and it’s wise to meet with them to assess their suitability for your case. Beyond aiding your case’s long-term strategy, engaging with an expert witness and appraiser could provide valuable insights to inform your decisions throughout the process.

Questions about the material presented in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material presented in today’s blog post, please feel free to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer complimentary consultations six days a week, available in person, over the phone, and via video. During these consultations, you can gain further insights into Texas family law and understand how your specific circumstances may impact a divorce or child custody case.

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