Business Valuations in 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, valuation of closely-held businesses and professional practices is not purely subjective. There are well-established methods, procedures and guidelines. The choice of the method to be used depends on the type of business being valued and the judgment of the appraiser.
The value of a closely-held business or of a 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: the net asset value method (cost approach), the market approach and the 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.
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 of the fact 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.
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.
This post was written by Kathryn J. Murphy.
“Helping clients weigh the benefits of any given action, as well as the financial and emotional costs, is at the core of everything we do.” – Kathryn Murphy