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Specialty tag(s): Business Valuation in Divorce, Divorce for Business Owners
How Is a Business Valued in Divorce?
Jeff Shore | October 14, 2022
Complicated property matters in a divorce often involve property where the fair market value is not easily or readily determined. Those often involve ownership of a business where the court has to determine the fair market value of the business within the divorce process. Many times the valuation is complicated because the individual spouse does not own the business, but it is held within an entity like a corporation, a partnership, or a limited liability company. Sometimes the married spouse does not own 100% of the business but has partners, which also impacts the valuation process. In some cases the asset to be valued is held inside a trust, further complicating the valuation process. In cases where the court is determining the value of complicated property, several steps are used in the divorce process.
With a written agreement
In some cases the owners of a business have entered into a written agreement and decided in their agreement how they will value the business in the event of a divorce. Under Texas law, when the owners of a business have entered into a written agreement with a process for determining value in the event of divorce, the courts will follow the valuation as agreed by the owners.
Without a written agreement
In other cases where the owners have not entered into a written agreement to establish the value of the company or value of a partner’s ownership interest in the event of divorce, the process is more complicated. In those cases the spouse may:
Hire a certified accountant who is a business valuation specialist.
The valuation expert relies on their special education, training, experience and often a certification to review the assets and the cash flow of the business and to form an opinion as to what is the fair market value of the marital interest in the business. For many cases this involves looking at not only financial documents, but with attention to whether the business is asset intensive, like a trucking company, or perhaps more of a service business, like a law firm. Texas courts have approved a methodology for business valuation that follows the Internal Revenue Service regulations for valuing a business when the owner dies. That valuation process is used for estate tax purposes, but we use the same methodology in Texas for valuing a business and the owner’s interest in a divorce.
Rely on the court.
If the divorce case goes to trial, the judge has to make a determination as to what is the value of the marital interest in the business. For spouses who have hired their own valuation expert, each of those experts may testify during the trial. The judge is not bound by the opinions of the experts but will make their own findings as to what is the value of the marital interest in the business at the time of the divorce.
Many people are curious about what the judge does to award the marital interest in the business following the trial of a divorce case. Depending on the value of the business and the value of other assets, the court may award the business to one spouse and award assets of equal value to the other spouse so that there is a fair and equitable division of the marital estate.
In cases where there are not enough other assets to equalize the division, one spouse might still be awarded the entire business and the other spouse would be awarded a money judgment to equalize the division. In those cases, the judge will establish and order not only the amount of money to be paid, but also a payment plan, an interest rate, and oftentimes the judge will assign security or collateral for the amount to be paid. This will usually include as collateral the business interest being awarded to the other spouse, but it might also include other assets so that the spouse receiving money under the payment plan will have security for the amount that they are being paid.
So, if you are thinking about divorce, or are involved in a divorce where there is a business corporation, a partnership, limited liability company (LLC) or a trust, the most important advice that I could share with you is to hire a lawyer who has experience and knowledge in these areas of the law.
Jeff Shore is Board Certified in Family Law by the Texas Board of Legal Specialization. He is rated “AV” by his peers which is the highest rating in legal ability and ethical standards. Time as a civil business litigator early in Jeff’s career honed his technical skills and business acumen. He is adept at handling complex property cases involving partnerships, business valuation and asset tracing. When representing business owners, Jeff protects their interests in determining how assets are to be divided. When assisting non-moneyed spouses, he ensures they understand finances and secure resources for their post-divorce lives.
For more information on how to divide complex estates in divorce, please contact Jeff Shore at 214-473-9696.