How To Value A Business in a Divorce
Establishing the value of a closely held business is always a tricky proposition. Determining the value of a business for the purpose of dividing it in a divorce is packed with its own unique pitfalls. Because of the adversarial nature of a divorce and competing priorities of each spouse for establishing the value of a business, there are frequently inconsistent results.
Texas courts attempt to discern the “fair market value” of a business, that is, the amount that a willing “buyer would pay for a business who desires to buy but who is not required to buy” from a “seller who desires to sell but is under no necessity to sell.” Compare this to the book value of Company, where one would list the total value of the assets on the books and determine value by deducting the total liabilities. As you can imagine, these models can produce disparate results.
It is important to find a family lawyer with experience dealing with professionals, such as forensic accountants, who not only appraise businesses, but who have experience testifying as to their findings. In determining the business value, these professionals will need a description of the business, its marketplace and competitors; quarterly balance sheets; income statements such as profit and loss reports; tax returns and audits; the business’ ownership structure and financial forecasts; payroll data; product inventory and an accounts receivable aging report.
Also when establishing the value of the business, courts do not look to divide a person’s goodwill but do consider the business goodwill. What this means is that goodwill that is attached to an individual and their particular trusted skill is not divisible in divorce. For example, a spouse who is an individual owner in a personal service enterprise, such as a solo physician, carries with them individual goodwill, as clients trust the individual. Whereas, when the personal reputation and good name of a business is distinct from an individual person’s abilities, that “business goodwill” is divisible in a divorce.
Beyond establishing the fair market value of a business and distinguishing individual from business goodwill, it is necessary to hire forensic accountants because of their expertise in determining easily overlooked but often times impactful elements such as: devaluing a spouse’s minority share in a business because of its lack of marketability when considered separate from the majority share, details in a shareholder agreement, such as a buy-sell agreement, when a spouse business owner might be required to first sell stock back to other owners of the business, which under a fair market value valuation would establish the value of the stock as zero and thereby significantly devalue the business; and, whether or not a spouse should be allowed to compete in the business after the divorce and thereby, if a non-compete agreement is necessary.
Because the method of valuation, and even the person applying the method of valuation is so critical to determining the valuation of a business in a divorce proceeding, it is critical to ensure that you not only have the right experts on your side value in that business, but also the right attorney who can work with those experts both in and out of court to ensure that a court has the correct information when making a business valuation decision.