Business valuation in a Texas divorce begins with two separate questions: what ownership interest belongs to the marital estate, and what that interest is worth. Annual revenue, an owner’s salary and the value of the business are different figures.
A profitable company may carry substantial debt or depend heavily on one person’s work. A smaller ownership percentage may also have restrictions that affect the analysis. Start with the actual ownership documents rather than a rough estimate of what the company could sell for.
The Alchemy Attorneys, PLLC provides divorce representation in Austin. Where a business is involved, legal advice and an appropriate valuation professional may address different parts of the property question.
Ownership character comes before the division
Texas Family Code Chapter 3 distinguishes separate and community property. When and how an ownership interest was acquired matters. A business formed before marriage raises a different starting question from an interest acquired during marriage.
The name on the company records does not answer every marital-property issue. Gifts, inheritance, later acquisitions and contributions during marriage may require additional evidence. A reimbursement question is also different from deciding ownership of the underlying interest.
Section 7.001 calls for a just and right division of the marital estate. It does not require every company to be sold or every ownership interest to be split equally.
Revenue is not the same as business value
A revenue total omits expenses, debt, necessary reinvestment and risk. Owner distributions may differ from accounting profit, and a temporary increase or decrease may distort a simple comparison.
Ask the valuation professional which period, valuation date and assumptions the report uses. Check whether the information reflects recurring operations or an unusual event, such as a one-time contract, asset sale or major customer departure.
A useful report explains the reasoning behind the figure. Two estimates are difficult to compare when they measure different dates or use different assumptions about compensation, liabilities or continuing operations.
Personal goodwill needs separate attention
Some earning ability depends on the owner’s personal reputation, relationships and continued work. That is different from value attached to a business that can continue independently.
The State Bar of Texas Family Law Section’s discussion of goodwill explains why personal goodwill must be distinguished from commercial goodwill in divorce valuation. Do not assume every dollar described as goodwill is a divisible community asset.
Ask how the analysis separates these concepts and what evidence supports the conclusion. The answer may matter for a professional practice, consulting company or other owner-dependent operation.
Records that help a valuation move forward
- Formation documents and current ownership percentages.
- Operating, partnership, shareholder and buy-sell agreements.
- Tax returns, financial statements and supporting ledgers.
- Business loans, guarantees and security agreements.
- Owner compensation, distributions and related-party transactions.
- Documents for major assets, contracts and unusual transactions.
- Any earlier valuation, purchase offer or ownership transfer.
Identify the date range of each set of records. If bookkeeping categories changed, explain that change rather than presenting inconsistent totals as directly comparable. Your lawyer and valuation professional can identify the additional material needed.
Protect the business while preserving records
Continue to distinguish ordinary operations from unusual transfers. Before changing owner compensation, moving assets or making a major distribution during the case, review applicable orders with counsel.
Provide records through an appropriate secure process. Business files may contain customer, employee or trade information unrelated to the divorce. Ask how relevant information can be exchanged while addressing confidentiality, rather than withholding everything or sending an unrestricted archive.
A settlement needs a workable payment plan
If one spouse retains an interest, the overall settlement should address how any offset or payment will be funded. A valuation figure does not mean that amount is available as cash.
Discuss payment dates, financing, required company consent, security and what happens if a proposed transaction cannot be completed. Have tax consequences assessed before assuming two proposed assets have equal after-tax value.
Bring a one-page ownership timeline and a list of available records to the first conversation. Flag disputed assumptions early. That creates a concrete starting point for deciding what must be valued and how the resulting terms could actually be carried out.
Published by The Alchemy Attorneys, PLLC. This article provides general information about Texas law, not advice for a particular case.
