Valuing a Business in a Texas Divorce

If you or your spouse own a business and are contemplating or beginning a divorce, this blog post is tailored to your family’s needs. Assessing the fair market value of a business in a Texas divorce presents a considerable challenge. To navigate this process effectively, seeking assistance, particularly from experts familiar with your locality, is essential. For instance, if you reside in San Antonio, Texas, partnering with a business valuation attorney from this area would be ideal.

Drawing from my experience as a family law attorney, I find the most complex and challenging aspect of business valuation lies in the fact that often neither spouse possesses all the necessary information for a proper valuation.

With that said, if you can know some of the more critical information about valuing a business before engaging in the divorce, you can better make decisions that benefit you in the years to come following your divorce.

Learning the Terminology Associated With Valuing a Business

In today’s blog post, I introduced the term “fair market value” before defining it. Fair market value refers to the cash amount a willing buyer, not obliged to buy, would pay to a willing seller, not forced to sell.

If you’re researching how to correctly value your or your spouse’s business, you might encounter the term “book value.” A company’s book value is its value as recorded in the business’s financial records. To calculate it, subtract all company liabilities from the total assets value as listed in the business books.

When thinking about corporations, we often envision large companies like Apple, Wal-Mart, or Home Depot. These are publicly traded companies with stock prices determined by an open market of buyers and sellers.

However, some corporations don’t publicly sell their stock. These are “closely held” corporations. Valuing the privately held stock of smaller companies like these is often more complex. An accountant typically takes part in this process, tasked with appraising the business to determine its value.

Is Looking Only at a Company’s Book Value an Accurate Way to Value the Business?

If you are beginning to proceed with a divorce, you may want to discuss with your attorney the available options to determine the value of your or your spouse’s closely held business. Beginning with book value, it is likely that they would tell you that it is not the best way to determine the value of a company from a stock perspective.

The reason lies in the fact that book value overlooks sources of value beyond the business’s physical assets. It neglects intangible sources such as the customer list and prospects for growth (future sales), which one should consider.

In the service industry, using the book valuation method will almost certainly undervalue a company, as its tangible assets are likely smaller compared to other companies.

What Your Attorney Will Need You to Provide Them at the Outset of Your Case

Valuing a Business in a Texas Divorce

Once you and your attorney have a game plan to value the business in question, you will need to provide them with documents and information that an appraiser will need before beginning their evaluation. In no specific order those documents are:

  1. A balance sheet for the past few years broken down into three-month increments. At least three years’ worth of balance sheets is an excellent place to start. Profit and loss statements divided up in the same manner and going back the same number of years are also needed.
  2. A description of the business. What does the company do? How long has the business been operating? What sort of market does it work in? What are your competitors? A list of your employees, as well as customers and vendors, is helpful as well to paint a complete picture of the business’s vital statistics.
  3. Tax Returns for the past five years. An appraiser will need to see your current and future tax liabilities and if the business has fallen behind on its taxes.
  4. Information on employee benefit plans health insurance coverage, including the annual costs of each. If the company offers profit sharing or stock options, this knowledge would be necessary for the appraiser to know.
  5. Finally, if your business does any internal forecasting for future finances, then those should be provided to your attorney as well. You and your spouse will likely split the costs of this accountant in a manner consistent with your ability to pay such an expert.

A forensic accountant will need to hire you and your spouse to value the business in question properly. This situation always proves interesting, as an appraiser can understand your business’s current operations and may use this insight for future projections based on your business’s forecasted achievements.

The Discovery Process

You can actively request all relevant documents from your spouse through the discovery process if they have access or knowledge of them.

Alternatively, you and your spouse’s attorney might agree to exchange whatever documents and information you both readily possess, initiating this lengthy process. Should acquiring essential information prove challenging, your attorney has the option to pursue these documents via court intervention.

It’s important that your attorney knows the necessary documents for accurately valuing a closely held business. When interviewing attorneys, consider asking about their approach and what they deem essential for a fair evaluation. Typically, in the midst of a case, both your attorney and your spouse’s attorney will likely set a mutually agreed deadline and method for document exchange.

Rules of the Road for Properly Valuing a Closely Held Business

In divorce cases involving business valuation, understanding the role of goodwill is crucial. Goodwill, in this context, refers to the reputation and customer loyalty your business has established. This becomes especially relevant when a forensic accountant appraises the business.

Two types of goodwill exist: personal and business. Personal goodwill stems from an individual’s positive reputation and relationships within the community. However, in the context of business valuation during a divorce, the focus is on business goodwill. This is the reputation and customer loyalty directly linked to the company, not the individual owner.

Personal goodwill holds significance but often fails to transfer when selling or liquidating a business. Conversely, business goodwill stands as a more enduring asset. Potential buyers value this sustained reputation and customer loyalty. An appraiser ought to consider this type of goodwill in valuing your business, given its potential for monetary translation. Grasping this difference can aid in securing a fair valuation of your business during divorce proceedings.

More Rules of Thumb to Value Your Business

Valuing a Business in a Texas Divorce

I appreciate your interest in this vital subject in the area of divorce in Texas. Again, I realize that most divorces in Texas will not have a small business that needs to be valued. However, for those that do, the process of valuing the company will be the most crucial aspect of your case after any issue relating to your children, most likely.

Questions about this subject or any other in family law can be addressed to the attorneys with the Law Office of Bryan Fagan, PLLC. If you would like to meet with one of our licensed family law attorneys, please do not hesitate to contact our office today. A free-of-charge consultation can be had at our office six days a week.

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Frequently Asked Questions

How much is a typical business valuation?

A typical business valuation can vary widely depending on factors such as the industry, the size of the business, and the complexity of its assets. Consulting with valuation experts can provide a more accurate estimate.

What is the rule of thumb for valuing a business?

The rule of thumb is a general guideline for valuation based on industry practices. However, it’s important to note that these rules can be oversimplified and may not consider the unique aspects of your business.

How do I calculate the value of my business?

Business valuation involves various methods, including the income approach, market approach, and asset-based approach. These methods consider factors like cash flows, comparable businesses, and asset values.

Should I get a business valuation?

If you’re dealing with divorce, estate planning, or considering selling your business, a valuation can provide crucial insights. Valuation helps make informed decisions about equitable distribution, taxes, and negotiations.

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