Schneider Law Firm

Business Valuation in Divorce: How it Works

In a divorce, property division can be complex. When a family business is involved, it can be especially complicated. Here’s what you should know.

Background: Property Division During Texas Divorces

Texas is a community property state, which means that property acquired by both spouses during a marriage is divided 50/50 during a divorce. The property acquired during the marriage is called “community property,” and other property is called “separate property.” Separate property includes things like property acquired before the marriage, property received as a gift by only one spouse and property inherited by only one spouse.
Businesses are divided according to these property division rules. If a business was started during the marriage by both spouses, a Texas court would be likely to consider it community property. But what if it was started by one spouse before the marriage, and then grown by both spouses working together? A Texas court might decide that part of the business was separate property and part was community property.
And what about the value of the business itself? How much is 50/50? Businesses are valued based on their fair market values – the amount that would be paid in cash by a willing buyer who would like to buy the business, but wasn’t forced, to a willing seller who would like to sell, but wasn’t forced.
It’s common for the spouses to disagree about the value of the business. The spouse who operates the business and plans to keep it after the divorce typically wants the valuation to be low. At the same time, the other spouse typically wants the business valued at a greater amount so they will receive a greater portion of the assets.

The Role of Experts in Business Valuation

Spouses and their lawyers typically turn to experts to assist in business valuation. These experts are usually certified public accountants (CPAs) who are accredited in business valuation. Sometimes one spouse hires a CPA. Other times, both sides hire their own experts to conduct independent valuations as part of the divorce process.

How the Value of a Business Is Determined

There is no one right way to value a business, and different CPAs may use different methods to arrive at different numbers. Different methods for business valuation include:

  • The asset approach: This approach calculates the value of the business by finding the value of the business’s assets after liabilities have been subtracted.
  • The market approach: This approach compares the business to other, similar businesses in similar markets.
  • The income approach: This approach looks at economic data to project the future income the business will generate. CPAs then convert that number into a present-day value.

No matter which method he or she chooses, a CPA has to review a significant amount of information in order to value a business. The financial records are critical, and business valuation often takes time and resources.

In Business Valuation, Have the Right Legal Team

If your divorce involves business valuation, your lawyer can work with a well-regarded CPA to properly value the business and make sure your rights are protected. Start by calling the Arlington office of the Schneider Law Firm, P.C., at 817-799-7125.

Sources:
https://www.law.com/texaslawyer/2019/03/20/business-valuations-in-divorce/