Business Valuations in Texas Divorce

Understanding Business Valuation in a Texas Divorce

When valuing a closely-held business, it is essential to have a thorough knowledge of the measures of value, the methods of valuation, and Texas case law. During a divorce, business valuation relies on well-established methods, procedures, and guidelines that must be followed. The choice of the method to be used depends on the type of business being valued and the judgment of the appraiser.

How Is a Business Valued in a Divorce?

The deciding factors of how to value a business for divorce are obtained from either the assets of the business, its earning capacity, or a combination of both. Although there is a great deal of subjective judgment involved, the appraiser should rely upon specific generally accepted methodologies and restrictions imposed by established case law.

During a Texas divorce, valuing a business, especially a closely-held one, usually follows three main approaches:

Net asset value/Cost approach
Market approach
Income approach

The net asset value method looks at the market value of assets less the value of liabilities. This is generally the floor value of the business. The market approach compares the company to transactions involving similar companies that have been sold. The income approach looks at the cash flow and projections of the company.

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What Documents Will a Valuator Ask For?

While each business is unique, there are a few key documents that you will need for a business valuation. Divorce cases involving business valuations may ask for these items:

The past five years’ financial statements and income tax returns

List of assets and debts of the business

Aged accounts receivable and payable

Contracts

Budgets and financial projections

Marketing materials

Documents and information particular to the industry

After reviewing the initial information, the business valuator will likely request additional documentation. This will often come as the valuator gains a better understanding of that business and its unique attributes. Collecting these documents may take some time, but it is vital to obtaining a correct business valuation.

What Adjustments are Made During Business Valuations?

When determining value, by whatever method adjustments may have to be made by the expert to set a more accurate value. Some standard adjustments made in valuing a business are a lack-of-marketability discount due to the recognition that there is little or no market for the stock of a closely-held corporation, and a minority-interest discount which reflects the minority interest owner’s inability to control dividend payments, company policy or liquidation of company assets.

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