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The importance of accurate business valuation in a divorce

On Behalf of | Aug 1, 2023 | Divorce |

As one of the only states with jurisdiction over community property, the Texas family court will decide how to divide your property in a divorce. If the law recognizes your business as community property, then it is no longer only your business. It is subject to property division, regardless of whether you own all the shares or did all the work to get the business to where it is today.

The court rarely allows divorced owners to share ownership. Therefore, the spouse who wants to keep the business must buy out the other spouse. Accurate business valuation ensures that the spouse will buy out the spouse at a price that is fair to both parties. Ultimately, the divorcing spouses would need to determine the standard of value they want to use before proceeding with an appraisal.

What is the standard of value in business valuation?

The standard of value is the value that the spouses want to obtain based on circumstances and hypothetical conditions. It is the definition of the value they want to calculate. Here are the different standards of value in business valuation:

  • Fair market value: The value of the business in the open market. Basically, the fair market price is how much a hypothetical seller would purchase the business from the hypothetical buyer and neither is under pressure to buy or sell it. Both parties have reasonable knowledge of the facts relevant to the transaction.
  • Fair value: The value the court determines is fair. It can be like fair market value but does not include minority discounts such as lack of control or marketability.
  • Investment value: The investment value is the economic value of the business to a particular investor. It looks at the potential investor’s risk and earning expectations. It also reflects the owner’s relationship with the other business owners and the potential synergy with other businesses.

Determining the value of a business can be confusing because there are varying methods to go about it, and they do not guarantee the same result. The divorcing parties can seek business valuation professionals’ help to define a value standard.

What is the standard of value in a Texas divorce?

A business has continuously moving parts that can affect its daily or hourly worth. Having a standard of value can eliminate discrepancies and allow the divorcing parties to establish what kind of value they want to determine, or which is most appropriate to their situation. In Texas, the court adheres to the fair market value of a business. However, by understanding the other methods available, you can compare valuations and get the most informed price.