If you or your spouse own a closely-held business, there is a strong chance that the business will play a central role in your divorce. Like all assets that are acquired or that appreciate in value during a marriage, the ownership interests in a closely-held business can qualify as “community property,” and this means that they can be subject to division as part of the divorce process.
But, in order to divide a business (or, as is often the case, in order for one spouse to give up his or her interest in a business in exchange for other assets), both spouses need to know what the business is worth. So, how do you value a closely-held business in a Texas divorce?
3 Key Considerations for Valuing a Closely-Held Business in a Divorce
1. Separate vs. Community Property
The first step in assessing the value of a business for purposes of a divorce is to determine what part of the business, if any, constitutes community property. If one or both spouses started the business during the marriage, then the entire business would generally be subject to division in the event of a divorce. But, if either spouse owned the business prior to the marriage, this can raise some challenging issues.
What was the value of the business on the date of the parties’ marriage? Has that value increased or decreased? Have distributions (which would generally constitute community property) been re-invested in the business? Have both spouses played a role in the business; or, has one spouse assumed household responsibilities so that the other could focus on managing the business exclusively? These are all threshold questions for determining the value of a closely-held business that will be subject to division in a divorce.
2. Methodologies for Valuing Closely-Held Businesses
There are a few different methods for valuing a closely-held business for purposes of a divorce. Each method relies heavily on documentation; and, when seeking to value a business as part of the divorce process, both spouses should have equal access to the information they need in order to reach an accurate valuation. Minimally, this information should generally include:
- Tax returns
- Income statements
- Balance sheets
- Profit and loss reports
- Account statements
- Lists of assets and liabilities
The simplest method for valuing a closely-held business is the asset-based valuation. With this approach, the company’s liabilities are subtracted from its assets, and the difference is deemed to be the value of the business. This includes physical assets such as equipment and inventory, as well as intangible assets such as trademarks and patents.
An income-based valuation focuses on the company’s revenue. After taking into account payroll, taxes, and other expenses, a capitalization rate is applied to the company’s net income to determine its value as a going concern.
A market valuation is similar to the method used to appraise real estate when you are buying or selling a home. An appraiser will look at the business in light of recent sales and its own unique risks and characteristics in order to determine what a third-party would be willing to pay in an arms-length transaction.
3. Reconciling Competing Valuations During a Divorce
In a divorce, each spouse typically has different goals with regard to business valuation. As a result, disputes are common, and divorcing spouses will frequently need to address “competing” valuations in a way that allows them to arrive at a mutually agreeable resolution. Litigation may be necessary if the spouses cannot come to terms, although it will generally be in both spouses’ best interests to find a solution without going to trial.
Speak with a Texas Divorce Lawyer at The Wright Firm
If you are preparing for a divorce in Texas and would like more information about business valuation, we encourage you to get in touch. To speak with an experienced divorce attorney in confidence, please call 972-353-4600 or inquire online today.