Business Valuation in Divorce

Businesses Acquired during Marriage

In Texas, businesses acquired during a marriage are typically considered community property, just like any other property. In some cases, there may be pre-marital or post-marital agreements that define each spouse's interest in a business. However, if such an agreement doesn't exist, a business acquired during the marriage is presumed to be community property. Additionally, portions of the value of any business obtained by one spouse prior to the marriage may also be community property or may give rise to a reimbursement claim to the community estate, especially if the non-owner spouse contributed to the business's growth or marital assets were used to fund it. If some or all of a business is community property, it is crucial to ensure that its value is accurately assessed to facilitate a fair distribution of community property. Therefore, seeking assistance from experienced divorce counsel is advisable to navigate the complexities of business valuation in divorce cases.

Market Value vs Book Value

The value of a business can be measured in different ways. Two commonly used measures are the fair market value and the book value. The fair market value reflects the amount a buyer would pay for a business if the buyer was interested in buying it, but not obligated to do so, and if the seller was willing to sell but not compelled to. This value takes into account intangible factors such as the business's reputation and goodwill. In contrast, the book value of a business only considers its financial worth, which is calculated by subtracting liabilities from the value of assets and property. As a result, the book value is usually lower than the market value.

Methods of Business Valuation in Divorce

Various methods are available for determining the value of a business, including the income-based approach, asset-based approach, and market-based approach. The suitability of each method depends on factors specific to the business and your ownership interest. The straight book value is typically not preferred by Texas courts because it may not accurately reflect a business's true worth. However, the adjusted book value, which involves determining the market value of the business's tangible assets and subtracting any liabilities, is a common asset-based approach. Income-based approaches assess a business's potential future income, and there are various methods for this type of valuation. Market-based approaches look at comparable businesses' sales to establish a business's fair market value. In cases where no comparable businesses are available, using the comparable business method can be challenging.

An expert business appraiser is likely needed to determine the business's value accurately. The appraiser will evaluate the business's financial records, such as bank statements, records of monthly and annual expenses, tax returns, and other relevant information to develop an estimate of its true value. A qualified divorce attorney can help you understand the advantages and drawbacks of each valuation method and advise you on which method would be most beneficial for your case.