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Fort Worth Family Lawyer Reveals: How Does Business Valuation Work?
The value of a business is an essential element of divorce proceedings. If a company is considered community property in a divorce, under Texas law, the business is subject to just and right division between spouses like any other asset. An accurate business valuation is essential. Proper valuation informs the parties and forms the basis of property division negotiations between spouses and their attorneys.
A reputable, experienced business valuator should undertake a business valuation. If a business is incorrectly valued, you may risk paying more than you should to your spouse or receiving fewer assets than you are entitled to in the divorce settlement. For the same reason we recommend an appraisal on the marital home, we recommend a valuation for the business.
When businesses are involved in a divorce, the process gets significantly more complicated. Typically, the support of both financial experts and skilled divorce attorneys is required to protect your interests and ensure you receive the settlement you deserve. This complex litigation process can be lengthy, and without experienced legal representation, you are vulnerable to losing more of your business and assets than you should.
At Youngblood Law, PLLC, we have helped countless clients successfully navigate complex divorces involving businesses and complicated assets. Our extensive experience handling business assets during a divorce means we are familiar with most of the complications that can arise. As such, we understand how best to deal with these issues and can use our expertise to find practical solutions in a timely manner. We understand how important a company can be to a business owner, and we will work tirelessly to protect your best interests and find solutions best suited to you, your business, and your family.
Contact our legal team today at 817-369-3970 to discuss how we can help you secure the best outcome possible in your divorce.
The Business Valuation Process
A reputable appraiser should undertake a business valuation. During the valuation, the valuator will use a recognized valuation method that best suits the specific details of your company. Generally, the valuation process will use one of three approaches, a market approach, an income approach, or an asset value approach. Depending on the type of business, different methods may be more helpful in calculating the value. A service-based business might benefit from one valuation method versus a retail business with substantial inventory on hand.
During the valuation process, you will need to provide most of your business’s documentation. This can include your accounts for the past five years, internal revenue service paperwork and previous tax reporting, details of assets and debts, contracts, and marketing materials. Your accountant, personal banker, or bookkeeper should assist with producing these documents.
Pro Tip: Accountants, bookkeepers, and sometimes even bankers charge for their services. However, having these documents produced and organized by these professionals will save you significant money when compared to turning over raw files to your attorney. Accountants and bookkeepers charge significantly less per hour than attorneys or attorney staff.
Spouses often disagree on the value of the business. Both spouses have a financial interest in the value of the company. It is usually in the spouse who doesn’t own or operate the business’s best interests to have the company valued as high as possible, as this can result in them receiving a larger buy-out or more of the business’s assets in the divorce settlement. Conversely, the spouse who owns and operates the business will likely want the valuation lower to reduce the buy-out amount to the other spouse in the divorce.
Either spouse can request a business valuation. Both spouses commonly pay their expert valuator, hoping to show a favorable valuation. A competing expert is required to discredit an expert valuator’s testimony and evidence at trial. Two business valuators means double the cost of expert investigatory work and double the expert fees for appearing at trial to testify.
Pro tip: A legal concept that applies to businesses is called goodwill. The portion of the business associated directly with the owner is the owner’s personal goodwill. Personal goodwill cannot be divided in a divorce. Only the professional goodwill can be divided. So even if a business is community property, it is possible that the entire business can be indivisible because the business is a sole proprietor-type business that rises and falls on the individual owner. The value attributed by valuators to the owner’s personal goodwill is a major point of contention between competing business valuations in a divorce.
Business Valuation Methods
There are many factors to consider and ways to determine business value, including market capitalization, net income, cash flows, liquidation value, book value, and business assets. Your business must be valued using the most suitable approach to ensure that the outcome accurately represents a company’s value.
If a business is valued inaccurately in a divorce, this could lead to a spouse receiving too much or too little in the settlement or the other spouse paying out more than they should.
Income Based Valuation
Income-based approaches to business valuations use a company’s income over a specific period of time to determine its overall market value.
There are two leading income-based valuation approaches that an accountant could take to determine the value of your business. Typically, the capitalization of the cash flow method is used when a company’s profit and growth are expected to stay relatively similar to current levels in the future. This method is often more beneficial to determine the value of a mature company with modest predictions for growth.
A discounted cash flow analysis will likely be more applicable for companies with less steady growth predictions. The discounted cash flow method is more flexible than the capitalization of cash flow approach. It allows business owners with less predictable margins and growth to gain an accurate company valuation for their circumstances.
Market-based valuations use data and information on how other similar companies have sold and the amounts they have sold for in your area to determine the current market value of your business.
However, gaining an accurate picture of fair market value with this method can be challenging due to the substantial variability between similar businesses. Depending on the nature of your business, it may be more challenging to accurately understand how much your business is worth with this valuation method. Factors that set your business apart from competitors, like proprietary processes, productive capacity, profitability, and throughput consistency, may be undervalued compared to other, less effective competitors.
An asset-based business valuation method reviews the company’s tangible and intangible assets. Each asset is assigned a value, which collectively forms the company valuation. This approach considers intangible assets such as a company’s brand and reputation, which can be subjective and open to interpretation.
Pro Tip: The assets owned by the business cannot be divided in the divorce. Only the value of the divorce is divisible. So inventory, accounts receivable, vehicles, tools, heavy equipment, intellectual property, and more stay with the business. The court does not divvy portions of the business to the spouses in a divorce.
Why Would I Need A Business Valuation?
In the divorce process, a couple’s community property assets are subject to division between spouses. This can include a family business operated by both spouses or exclusively by one spouse. A business valuation is required to understand how much the company is worth, which may influence what happens to the business in a divorce. Likewise, the business’s value is an asset that can be awarded to one spouse while other marital assets are awarded to the other to achieve a just and right division in the divorce.
Both spouses often commission separate business valuations, and the valuations rarely return the same figure. Divorcing spouses will need to agree on how to manage this difference to inform future steps in the divorce process. Without an agreement, the issue of the business’s value and associated facts will be presented to the judge at trial so the judge can decide how to divide the estate fairly.
Is My Business Considered Marital Property?
Texas is a community property state, which means that marital property is subject to division in line with the state’s community property laws. Under these laws, any assets and property from the marriage considered community property is subject to a ‘just and right’ division between divorcing spouses. What constitutes just and right is subjective and can be left to the judge’s discretion. Rarely will this mean that community property will be split 50/50 between a divorcing couple.
Typically, there is no one-size-fits-all answer to whether your business will be considered community property and potentially divided between you and your spouse in a divorce. If one spouse owned a business before marriage, it may be separate property. However, revenues generated by the business during the marriage are community property. Additionally, resources put into the business from the community estate are subject to reimbursement to the community estate in the divorce division.
Every divorce involving a business is unique and will include nuances that could change how the company and ownership are viewed. For this reason, divorces with family businesses can be challenging and lengthy. Securing advice from a divorce lawyer with experience handling divorces with business assets will benefit you and your company.
Joint Owned Business
Businesses started during a marriage are considered community property. Even if only one spouse is involved in the business, it is still community property if it began during the marriage; the other spouse has an equity interest in the business even if there is no managing interest. A community property business is divisible in a divorce.
To add a level of complexity, if two people start a business before they are married, that business is not community property. Instead, both spouses have a 1/2 separate property ownership interest in the business. This situation is complex in a divorce, especially if the business is a large asset in the marital estate.
Spouses will need to agree on whether they will continue to co-own together or divide the business. If dividing the business is chosen, then how the company will be divided becomes the question. If spouses can’t agree, they can negotiate through their attorneys or have a Judge decide in a divorce trial. Generally, it is in both spouses’ and the company’s best interests to reach an agreement without a Judge. A Judge may not consider every factor relevant to your business in their decision, or they will decide that the business will be sold and the profits split.
Individually Owned Business
Determining whether a business falls into community or separate property categories can be complex. The general rule is if one spouse owned an asset, business, or property before the marriage, this could be considered separate property. With some assets, this can be a simple and easily applicable concept. However, with businesses, this rule can be more complicated. For example, if a business has grown in value within the duration of your marriage, this could be considered community property and subject to division in the divorce, even if it was owned before marriage.
Additional factors, such as restructuring the business, gifts from the business to the household or spouse, sale of ownership interests to third parties, and more, can prevent a pure assessment of the company’s character.
What Happens To A Business During A Divorce?
During a divorce, spouses can agree upon dividing all marital assets, including real estate, property, and businesses. These agreements are outlined and legally finalized in the divorce decree. If spouses can’t reach agreements through out-of-court negotiations with their attorneys, they have the option of formal mediation or a trial in divorce court.
The future of your business can be a huge concern for small business owners who are going through a divorce. The initial step in a divorce involving a business is to determine whether the company falls into the category of community property.
If your business is considered community property, a range of options may allow you to keep the business you have worked so hard for. Your family law attorney may be able to negotiate an agreement with your spouse to buy out their share of the company or assign a percentage of business income or assets to them. Your business’s valuation will inform these negotiations and guide how much it might cost to buy out your spouse from the company.
Alternatively, a couple can sell the business and divide the profits. Although this offers a new investment opportunity, often, this is a last resort for most business owners who do not want to sell the culmination of years of hard work. If you do not want to sell your business, a family law attorney with solid negotiation skills is crucial to help you find a solution that avoids this scenario with your spouse.
Is My Business Safe In A Divorce If I Have A Prenup?
A pre or post-nuptial agreement can grant you some protection against the division of your business in your divorce. The amount of detail and exact agreements made in your prenup will determine how much protection your business has in your divorce.
However, these agreements are complex, and it should not be assumed that your prenup will ensure your business is safe from the property division. For example, many prenups apply to the value of the business at the time of the marriage. If the business value has increased within the duration of the marriage, this might not be covered by the prenup. Likewise, funds moved between the business, and the household can affect the property division related to the business. A divorce attorney will be able to help you understand the exact level of protection granted by your prenuptial agreement.
Do I Need a Family Law Attorney?
Even simple divorces are challenging, stressful, and usually emotional for all parties involved. When a business is included in the process, this further complicates the divorce, often increases tensions between spouses, and can significantly extend how long the divorce takes to complete. Representation from an experienced Fort Worth divorce attorney can be invaluable in aiding the entire divorce process and protecting your interests.
Your attorney will assist with every element of your divorce, including your business. First, they can support the valuation process to ensure that the business is valued correctly and accurately represented. Additionally, where your attorney’s skill can bring value is in gathering the evidence to ensure that your business is not unfairly subject to division in the divorce when it is, in fact, separate property.
A reputable divorce lawyer will also help to ensure your business valuation is fair, accurate, and not over-inflated or underestimated. If necessary, they will seek expert opinion to review the accuracy of any business valuations you disagree with.
Additionally, your legal counsel can negotiate with your spouse and their attorney to identify solutions that can help you keep your business. This could include negotiating a regular payment of the business’s profits or dividing other marital assets that allow you to maintain ownership of your company.
Contact a Family Law Attorney Forth Worth Residents Recommend!
As a business owner, you likely have enough to think about running your company without worrying about how your divorce will affect your business. Securing skilled legal representation will reduce the stress of navigating such a complicated divorce while protecting your assets and best interests.
The ways in which a reputable Fort Worth divorce attorney can benefit your settlement are significant. For example, your attorney may be able to prove that your business is separate property or trace marital funds invested in the business for division, which could save your overall business from division between you and your spouse.
With skilled legal counsel from Youngblood Law, PLLC, you can rest assured that your divorce and the future of your business are in safe hands. We will fight tirelessly to protect your assets and negotiate fiercely to secure your best possible settlement. Our commitment to developing tailored solutions for every client we work with means you will leave your divorce in the strongest possible position to move on with your life and company.
There is a lot at stake in a divorce involving complex assets and businesses. This makes the caliber of your legal representation even more important. Do not take the risk of less than adequate representation with the company that you have worked so hard for.
Please book a consultation with an experienced Fort Worth divorce attorney from Youngblood Law, PLLC, today by calling our team at 817-369-3970.