How a Business Is Valued in a Texas Divorce

How is a privately owned company valued during divorce?

By a valuation expert who applies standard methods and reconciles them into one value. Texas courts generally look for fair market value: what a willing buyer would pay a willing seller, neither forced to act and both reasonably informed.

• Income approach: projects the company's earnings or cash flow and converts them to a present value.
• Market approach: compares the company with sales of similar businesses or interests.
• Asset approach: adds up what the company owns and subtracts what it owes.

The expert also normalizes the books. Owner salary that is far above or below market, personal expenses run through the company and one-time events are adjusted so the value reflects how the business really earns. For a minority interest, discounts for lack of control and lack of marketability may apply.

Do I need a business valuation expert for divorce?

Usually yes when the business is a significant asset. Texas law does not require one, and spouses can agree on a value themselves, but an agreed number without support often favors whoever knows the books best.

Options include one jointly hired neutral expert, which can save money when trust is reasonable, or an expert for each side when the value is likely to be contested. A forensic accountant may also be needed if income or assets appear to be missing. John B. Polk works with valuation experts and forensic accountants on these cases.

Expect the expert to ask for several years of tax returns and financial statements, the company agreement or bylaws, payroll and owner compensation records, major contracts, loan documents and any earlier valuations or offers to buy. The faster those arrive, the sooner the case has a number both sides can work from.

How much does a divorce business valuation cost in Dallas?

The cost depends on the scope of the work, so there is no single figure. These are the main drivers:

• How large and complex the company is, and how many entities are involved.
• How organized the financial records are.
• Whether a written report and trial testimony are needed, or a calculation for settlement only.
• Whether the spouses share one neutral expert or each hire their own.
• Whether a forensic review of missing income is needed as well.

At a consultation, John can explain what level of valuation your case calls for and help you get quotes from qualified experts.

How is business goodwill treated in a Texas divorce?

Personal goodwill is not divided, and enterprise goodwill can be. Since Nail v. Nail, decided by the Texas Supreme Court in 1972, Texas courts have held that goodwill attached to a person's own skill, reputation and relationships is not property that can be divided in a divorce.

Goodwill that belongs to the business itself, such as its brand, systems, location, staff and contracts that would stay if the owner left, is part of the company's value. The expert has to separate the two. For a medical, legal or accounting practice, or a firm built around one person, the answer can change the value substantially.

How do courts value a business that isn't making a profit, or has a lot of debt?

By looking past the income statement. When a company is not profitable, experts rely more on the asset approach, on sales of comparable businesses and on realistic future prospects. A start-up with strong contracts can be worth more than its current earnings suggest.

Low profit is also a question, not just an answer. If owner pay, family members on payroll or personal expenses run through the company, the expert adjusts for them. A sudden drop in profit around the time of the divorce gets close scrutiny.

Debt reduces value: the company's liabilities are subtracted in the asset approach and reflected in cash flow in the income approach. Personal guarantees signed by a spouse are a separate issue, and the decree should say who stays liable on them.

What happens to retained earnings in a business during divorce?

They generally stay with the company. Texas courts have treated a corporation's retained earnings as company property, not community or separate property of the shareholder, unless the company is shown to be the owner's alter ego.

Retained earnings still affect the result. Cash and other assets kept in the company raise the value of the ownership interest, and that value is divided if the interest is community. Distributions actually paid to an owner during the marriage are generally community.

What if my spouse says my company is worth more than it really is?

Test the valuation with your own expert. A rebuttal expert reviews the other report for inflated growth projections, comparable sales that are not truly comparable, personal goodwill counted as enterprise goodwill, ignored debts and owner pay that was not normalized.

1. Obtain the other expert's full file through discovery.
2. Have your expert prepare a review or a competing valuation.
3. Question the other expert in a deposition.
4. Ask the court to exclude an unreliable opinion under Texas Rule of Evidence 702.
5. Present both values at mediation or trial and let the facts decide.

See how John handles business cases or contact him to review a valuation you have received.