Valuation of a Business

Family Law Articles

It is the American Dream to create and build a business through time, toil and talent.  To now worry about how that business will be treated in dividing the community property is unnerving.  Often business owners worry that all of their hard work will be destroyed and leave them destitute, or worse yet, that they will have to run a business with their ex-spouse making decisions for the business.

Valuation of a business can be a fairly complicated process.  How the business is valued, depends on the type of business.  Also, closely held businesses can present unique issues when both spouses work for the business or have Do Not Compete contracts.  Another issue that often arises, is various family members may have stock or ownership in the business entity.  All of these factors must be taken into consideration when a business is involved.

Can My Spouse Take Half My Business?

It is unlikely that your spouse will be awarded half of your business.  The business, however, may be a community asset that is considered in dividing the community property.   So, the first step is determining whether the business is even community property or whether it is separate property. 

If the business is proven by “clear and convincing” evidence to be the separate property of one of the spouses, then it must be awarded to that spouse in the divorce.  This usually occurs when the business was created prior to the marriage.  If the business was created during the marriage, it is likely to be community property and its’ value will be taken into consideration in dividing the entire community estate. 

Even though it may be community property, it does not mean that the business should be divided or that you and your ex-spouse will be operating the business together.   The value of the community property business will be taken into consideration in the division of the entire global community property.   Not every asset is divided in half. 

The fair market value of a business is most often determined by an expert and each party may have competing experts.  Ultimately, the Court will determine what the fair market value of the business is by weighing the credibility of each expert and the methodology each used in arriving at a value for the business. 

There are three common approaches that experts use to value a business:

  1. Income based approach.  This approach utilizes the cash flow and future projections of the company to determine the value.   
  • Asset based approach.  This approach uses the market value of assets less the value of the liabilities of the business to determine the value. 
  • Market based approach.  This approach uses values of similar companies that have sold to determine the value. 

Which approach is utilized usually depends on the type of business being evaluated and, perhaps, the evaluator’s subjective judgment.   Each business is unique.  Hiring an expert to value the business early in the process allows more time for that expert to understand those unique aspects of the business, especially when both spouses work for the company or when various family members hold stock or ownership in the business entity.

What if the Business Cannot Exist Without the Personal Goodwill of one of the Spouses?

Personal Goodwill usually arises when the business relies on the reputation or specific talent of one of the spouses like a law practice, medical practice, or dental practice.  Without this spouse the business has little to no value.  Texas law is clear that the personal goodwill of a spouse cannot be utilized in the valuation process.  Likewise, the value of future labor after the divorce will not be included in the valuation process.  Any other assets of the business, can be considered though, like equipment, office furniture, fixtures or supplies.   

The best way to protect your business is to hire an experienced divorce attorney that can help you hire the right expert and present the proper evidence to the Court.  Robin R. Zegen has extensive experience with business valuation cases.  Call Robin R. Zegen for a consultation today so you can begin protecting your business and your financial future.