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How are businesses valued during a Texas divorce?

On Behalf of | Feb 16, 2024 | Property Division |

Texas is a community property state, meaning that state law requires marital assets to be divided fairly. Which assets fall into the marital estate can be a contentious question in your divorce, and the answer can have a profound impact on your post-divorce financial well-being.

This is especially true if you’re a business owner. If your business ends up subjected to the property division process, then you could lose control of business operations, be required to buy your spouse out of their position, or be forced to dissolve your business.

While none of those options are ideal, as you head into your divorce you need to be prepared to protect your stance and your business as much as you can. This includes arguing that the business is individually owned property, if you can make that argument in good faith, and ensuring that you have a proper business valuation conducted.

The purpose of business valuation in a divorce

If your business is going to be addressed in property division, then you’ll want a realistic picture of what your business is worth. That might sound simple enough, but there are several ways to value a business, with each potentially coming to a different valuation conclusion. These methodologies include:

  • The income approach: This methodology of valuation is complex, but it often gives the most accurate portrayal of a business’s value. Here, the valuator assesses the business’s historical income in a way that allows them to project future earnings. Of course, income can fluctuate over time based on market conditions and supply chains, which makes this approach extremely complicated.
  • The market approach: This form of valuation is best utilized when the business is to be sold. To accurately gauge the business’s value, then, the valuator seeks out comparable businesses that have sold in your area. It’s crucial that the valuator looks for businesses that were recently sold, are within the same industry, and had similar earnings. Otherwise, you might get a skewed outcome. Given the difficulty with identifying similar businesses, this approach is often challenging to implement.
  • The asset approach: This methodology is relatively straightforward. The appraiser simply valuates your business assets and subtracts any outstanding liabilities. This approach is favored when a business is struggling to earn steady income and there isn’t a comparable business that has sold in your region. It’s also beneficial to use if your business has a lot of equipment or a fleet of vehicles.

If you anticipate buying your spouse out of their position, then you’ll want to utilize the approach that gives you the lowest yet realistic value of your business. The approach that you choose, then, might depend on your unique set of circumstances. Don’t forget, too, that your spouse will have their own ideas about how the business should be valuated, so be prepared to advocate for what you think is best.

Aggressively protect your business during your divorce

Remember, you can negotiate settlement in your divorce. Therefore, you might have the ability to give up other marital assets in exchange for retaining your business. As you head into the property division process, you just have to have a well formulated game plan so that you know what you want and how best to get it.

If you’re unsure about how to develop a divorce legal strategy, don’t worry. There are a lot of resources out there you can turn to for help, including your attorney. By doing so, you’ll hopefully set yourself on a path toward a favorable and fresh start to the next chapter of your life.