Pursuing Fair And Appropriate Business Valuation
Valuation of business interests is particularly challenging in divorce.
A key part of wrapping up the financial part of a marriage in divorce is a fair division of property, which cannot be just unless valuation is accurate and made according to proper professional standards. Valuation issues in divorce can be particularly challenging when business interests are involved.
In Texas, most property acquired by either spouse or by them together during the marriage is considered community property subject to division between them in divorce. Texas law requires that this division be “just and right,” which may not always be 50-50, depending on what would be fair and equitable under the particular family circumstances.
Obviously, to craft a fair property division, all property must be appropriately and accurately valued. While valuation is straightforward for many types of property, difficult legal and accounting issues may arise in the valuation of business interests.
No matter the wealth of the couple or the size of the business, business valuation is important to establishing the standard of living of each spouse after the marriage ends. For a person of relatively average worth, the amount of money or capital received from business interests can make a huge difference in the standard of living going forward, such as whether the divorced spouse can afford to buy a home or new car or afford to take vacations.
For a wealthy divorcing spouse, proper business valuation could secure a substantial amount of worth that could be invested, used to finance a comfortable lifestyle or designated as an inheritance for children and grandchildren. Conversely, if the business valuation is improperly low, these financial benefits could be unfairly restricted.
Which Business Assets Are Community Property?
Business interests that are part of the community property to be divided could include:
- A sole proprietorship (when an individual opens his or her own business without incorporating or creating any legal entity)
- Interest in a professional practice such as of law, accounting, architecture or medicine
- Partnership interest
- Membership interest in a limited liability company
- Stock ownership in a small, closely held corporation
- Stock ownership in a large, publicly held corporation
Valuation issues become particularly complex when closely held family businesses are involved. Partnership or shareholder agreements in such businesses may include restrictions on ownership transfers and pricing, as well as discount provisions, that can significantly impact value. Determining fair value of an interest that is highly valuable to those involved in the family business, but not valuable in the outside market, can be challenging.
Any Texan facing divorce in which business assets are an issue should be sure to find a knowledgeable family law attorney with experience in complex business valuation issues. Such a lawyer will have worked with a variety of reliable financial experts to assist in valuation like specialized accountants, forensic accountants and appraisers who will adhere to accepted professional standards.
A Texas family law firm well-prepared to take on tough business valuation matters in divorce is Fabio & Merrill, which has an office in the Greenway Plaza area of Houston.
Involving legal and financial professionals in business valuation for divorce is smart because without adherence to appropriate financial standards and to Texas court rulings governing the valuation standards to be applied to particular types of business assets, a property settlement agreement between parties may not be fair to one of them because of potential undervaluation or overvaluation. In addition, an inaccurate or improper valuation may not be accepted by the court if the parties do not settle and the matter has to be litigated.