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The importance of proper business valuation in a Texas divorce

On Behalf of | Dec 5, 2023 | Business Law |

The more property couples acquire during a marriage, the more they will have to disagree about when they divorce. Running a business can provide a family with a comfortable standard of living during a marriage, but it can quickly complicate the property division process during a divorce. 

People may worry about divorce negatively impacting the company’s resources or the possibility that they would need to continue running the business with their spouse even after the divorce. Reaching an appropriate agreement about what happens to the business may require a lot of negotiating between spouses. Litigation where a judge applies the Texas community property law could also occur.  

Proper business valuation will be crucial for the protection of the company and the negotiation of a property division settlement. 

There are multiple types of evaluation to consider

Business valuation can be a very controversial process during divorce, as spouses may disagree intensely about what the company is actually worth. Depending on what business valuation model the spouses use, they may arrive at vastly different figures for the company’s fair market value. 

The simplest and arguably most common method for valuation is market capitalization. This generally only works for publicly traded companies with a set stock or share price. On the other hand, some people will use a liquidation valuation process where they determine the cash value of a business based on the value of its assets.  

There are also different valuation models that look at company revenue or cash flow. Spouses may use the “times revenue method,” the “earnings multiplier method” or the “discounted cash flow method” to establish the current fair market value of the company based on sales and expenditures. Spouses may need to agree on a specific valuation method to reach similar values for the business. 

Beware of double dipping

If someone wants to continue owning the business after divorce, their spouse may ask for a portion of its value during property division and may also request alimony or spousal maintenance. This can put the person retaining the business in a difficult position where their future income from the business factors into their financial obligations twice

It will therefore be important for spouses to recognize when the business valuation process has already considered one spouse’s future income to avoid conflicts about unmet (and possibly unrealistic) expectations. 

When done properly, business valuation as part of a divorce can help spouses more amicably share the value of an asset likely to cause conflict in many cases. Obtaining support for the more challenging aspects of divorce, including business valuation, may help business owners protect the company they run and their future financial resources.