What Happens to a Business During a Texas Divorce?
Under Texas law, all assets acquired during a marriage are treated as community property—owned equally by both spouses, and divided equally between the two during a divorce. Property owned by either spouse before the marriage is considered separate property.
These distinctions are important when figuring out what to do when you or your spouse own a business. Not surprisingly, businesses usually get attacked by both parties’ lawyers when it comes to property division. Who owns the business? What is the character of the business? Who is entitled to what part of the business?What is the Valuation Process?
This is where valuation comes in. It’s essentially a process of determining the value of the business and what you and your spouse can receive in a divorce, leveraging historical data to determine how much the business is worth using the following value systems.a. Fair Market Value
As stated in Chapter. 7-A, Section 5.2 of the Texas Family Code, fair market value (FMV) is the price the property will bring when it is offered for sale by someone who wants to sell the property and someone who wants to buy it.
Ch. 7-A, §5.2 further notes that if a property does not have an FMV, it can be valued using its intrinsic value.b. Intrinsic Value
As per Rosenfield v. White, 267 S.W.2d 596, 601, the intrinsic value, or actual, is the actual monetary value of the property’s use to the owner, excluding any fanciful or sentimental consideration.
Note that the fair market value of a property should not be confused with its intrinsic value.
FMV is usually hypothetical. In contrast, intrinsic value is determined after both buyer and seller have negotiated its value. These negotiations rarely happen during a divorce, which is why determining FMV is usually the more convenient option. The trade-off is that FMV is not always accurate, while intrinsic value usually is.c. Value to the Owner
A valuation can also look at the company’s intangible value to the owner, based on factors such as:
- Its workforce
- Its operating assets
- Its systems and organizational structure
- Its processes
As with the intrinsic value approach, looking at a property’s value to the owner is an option only when FMV cannot be determined.d. Book Value
Last but not least is the book value system, which means looking at the company’s assets minus the liabilities. Book value is rarely used as a lone valuation option, as it does not capture the potential of the business.What Valuation Methods can be Used in a Divorce?
During a divorce, each party can use any valuation method deemed effective. These methods include, but are not limited to:
- Excess earnings
- Adjusted net asset
- Rule of thumb
- Discounted earnings
- Market approaches
The valuation of a business during a divorce is usually done in court. You can and should hire a Texas divorce lawyer and an appraiser or forensic accountant, who will request records such as:
- A detailed history and description of the business, its organization, market, products, services, workforce, customers, and suppliers
- Original purchase documents
- Balance sheets
- Company tax returns
- Financial statements
- Financial forecasts
- General ledger reports
- Buy and sell contracts
- Partnership agreements
- History of litigation
- Payroll data
- Market research studies
- Loan applications
Dividing a business during a divorce is hardly a cut and dry process, often requiring a combination of valuation systems and methods. If are going through a divorce and need an appraisal of your finances and resources, schedule a consultation with Texas family law attorney Daniella Lyttle of the Lyttle Law Firm today to find out how we can help you.