4 Key things you should Know when Valuing a Business in Divorce

Why using an Expert is so Important

Valuing a business for sale is pretty straight-forward if you know a little about the basic approaches to valuation.  Once you determine the annual cash flow to equity or the appropriate market multiple, the calculation is relatively simple.   Many business owners are comfortable doing this themselves.  But if you are valuing a business interest for the purpose of dividing assets in a Divorce, the rules are much more complex and confusing, and hiring an expert is essential.  Here are four reasons why:

  • Personal Goodwill: Personal Goodwill is the portion of business goodwill that attaches to the individual instead of the actual business entity (enterprise goodwill).  Personal goodwill is not divisible in divorce in Texas and many other states.   The net effect can be HUGE.  Typically the value of the business is much lower after subtracting personal goodwill.   An example would be a dental practice with a single doctor who is the owner of the business.  The value of the dental practice may be $1 Million in total, but personal goodwill is often 80% or more in a practice like this, making the net value to be split in the marital estate just 20% or less of the total business value.
  • Buy Sell Agreements: A Buy Sell Agreement is a written agreement that details restrictions or rules that must be followed by shareholders in order to change their ownership interest in a business.  Oftentimes, these agreements specify how the business interest must be valued in the case of sale or divorce.  Buy Sell Agreements may take precedence over typical valuation rules, however, Texas Family Law is not consistent and one must carefully examine the facts in each individual case to determine if the Buy Sell Agreement takes precedence.
  • Operating Agreements for Professional Associations or Partnerships: Many professional services organizations (Law Firms, CPA Firms, Doctors offices) have Operating Agreements that limit the value of an individual shareholder’s business interest to no more than what is in his or her capital account, which is typically a small amount.  This is similar to the concept of personal goodwill.  Each situation is different and one must carefully examine the Operating Agreement and applicable Law in order to determine the value of an ownership interest in a Professional Practice.
  • Legal Precedent: Previous legal cases serve as guideposts for how a current business interest may be valued, especially in cases that have unique circumstances.  Failure to follow these legal precedents can cause your valuation to be disallowed in court, which means you are at the mercy of whatever value the other side chooses to submit.

These are just a few of the reasons why it is so important to engage an expert in valuation if you are facing a divorce and you own a business or a business interest.  Knowing the rules and applying them properly can make a significant financial impact.

Precision Valuation is a firm that specializes in Business Valuation for Divorce.  If you have questions call Scott Abels at 512-673-3530 or email at SAbels@PrecisionValSvcs.com .  There is no charge for the initial consultation.