Business Valuations in 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. While not an exact science, business valuations and professional practices are not purely subjective. There are well-established methods, procedures, and guidelines to follow. The choice of the method to be used depends on the type of business being valued and the judgment of the appraiser.
How Is the Business Value Determined?
The value of a closely-held business or of professional practice is 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 certain generally accepted methodologies as well as restrictions imposed by established case law.
There are three main approaches used in valuing a closely-held business:
- 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.
What Documents Will a Valuator Ask For?
While each business is unique, there are a few key documents that a valuator will ask for. These include:
- The past five years’ financial statements and income tax returns
- List of assets and debts of the business
- Aged accounts receivable and payable
- Budgets and financial projections
- Marketing materials
- Documents and information particular to the industry
After reviewing the initial information, the business valuator will most 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?
In determining value, by whatever method is used, adjustments may have to be made by the expert in order to set a more accurate value. Some common adjustments that are 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
The appraiser must be aware that certain factors generally included in the valuation methods must be separately accounted for in a divorce case. The expert must consider the spouse’s personal goodwill and the willingness of the party not to compete with the business. Value attributable to the personal goodwill of a divorcing spouse must be excluded from the value of the business or professional practice being evaluated
Why a Goranson Bain Ausley Attorney?
Business valuation issues are challenging for both the family law attorney and the expert hired to value a business or professional practice. The attorney must have an understanding of valuation principles in order to analyze a settlement or assess the likely outcome at trial. The attorney must be able to apply case law and consider the theories and principles underlying specific cases in order to present the client’s position to the judge or the jury.
At Goranson Bain Ausley, our attorneys offer considerable experience with business valuation cases. We understand the complexities of closely-held businesses and the financial and emotional issues that arise when these businesses must be assessed for division. Our attorneys will guide you through the process, working to protect your investment in your businesses, present your case persuasively, and strive to arrive at terms that represent a favorable resolution. Contact us today.