Business Valuation in Divorce: Determining How Much Your Business Is Worth

Business Valuation in Divorce: Determining How Much Your Business Is WorthIt is important to find out the value of your business before seeking a divorce. The reason for this is because you need to know how much of the business will be fairly divided among you and your spouse. Since you and your spouse may have different opinions about how much your business is worth, you both should have your own accountant or appraiser to give you an accurate and fair estimate.

If you do not choose to find out how much your business is actually worth, there is a good chance that it will not be divided fairly or equally, which means that you could end up shorting yourself.

Can’t I just guess the value of my business?

Couples who have businesses together may think that they can estimate the value of their businesses by looking at certain figures such as the gross revenue, net revenue, or even a random number that they came up with by themselves. However, when going through the divorce process, this is not the time to guess the value of your business.

Instead, you should remember that every business is unique and different, meaning that even if your business is similar to another person’s business, it will likely not have the same exact value. You need a professional who knows how to place a value on your business, which will help you when it comes time for the property division process in a divorce.

The details of the three business valuation approaches

There are three main approaches used by accountants, appraisers, and other professionals who determine the value of businesses. These three business valuation approaches are the income approach, asset approach, and the market approach. While the income approach is the most preferred technique to determine business values, all three work well and are used frequently. Below, we will go over the details of these three business valuation approaches and how they work.

  • The income approach: Many divorce lawyers, accountants, and other professionals would agree that the income approach is one of the most complicated methods to use when determining the value of a business. However, it is still the most-liked approach to use. When using the income approach, the accountant or appraiser will look at the company’s performance history to determine how much money it may make in the future. This means that the past cash flow or net profits will be used to give an estimate of the company’s future earnings. After this is determined, the number for the future earnings will be used to figure out the present value of the business.

There are two different ways that the income approach can be conducted, which is the capitalization of earnings and the discounting of cash flow methods. The capitalization of earnings method is typically used to calculate the business value of companies that have money steadily flowing in. This means that in order for this method to be used, the company must be able to show that they have some type of stability. Once this is established, the accountant or appraiser will simply calculate the cash flow or income expected during a certain timeframe. Then, they will divide that number by a capitalization rate.

The other method that falls under the income approach is the discounting of cash flow. This method is commonly used for businesses that may have future cash flow that changes. The accountant or appraiser will look at the past earnings of the company to gain an idea of how much income it may make in the future. While doing this, they will add in discounts or risks that may arise. The risks or discounts are found by looking at the various debts that the company possesses. To put this into perspective, if a couple decides to sell their business during a divorce, the buyer will need to see what type of debt the business has as well as how often the net income rises and falls. The reason that this is important is because the buyer will need to know if it is possible to pay off the debts of the business while still making some type of income even if it is a bad or slow year. The discounting of cash flow lays all this information out as well as gives the value of the business with possible risks in mind.

  • The market approach: The market approach for determining the value of a business is very similar to what happens during an appraisal for a house. Therefore, when couples plan to sell their business, they may lean toward using the market approach. This approach requires the accountant or appraiser to look over the various aspects of the business and compare it to similar companies in the area. For example, a franchise business in San Antonio, such as Sonic or Jack in the Box, can easily be compared to other similar franchise businesses. However, before this approach can be used, the appraiser or accountant must be able to calculate and determine the company’s profit, which can be difficult to do when you have to make a comparison to other businesses. Sometimes, they may be able to do this by looking at gross sales, but other times, they may need to use one of the methods mentioned in the income approach section.
  • The asset approach: Lastly, when an accountant or appraiser is unable to use the income or market approaches, they may decide to use the asset approach. This approach is usually only used if the business does not make enough money to determine a value for future income or if there are no other businesses in the area that are similar. However, sometimes, this method is preferred if the company’s assets are worth a lot. This means that the asset approach is mainly used for businesses that do not bring in much income or businesses that have several assets that are worth great amounts.

I started my business on my own in San Antonio, TX. Isn’t it considered separate property?

Business owners who are going through the divorce process often question whether their business is considered separate or community property. However, this takes a lot of discussion and analysis to determine the answer. You may point out that your business is something that you created in the dorm room of your college or even in your first apartment in your early or mid-20s, which was long before you were ever married. However, it is important to realize that your business may have become community property if the assets became blended in with the other community property assets during your marriage.

Therefore, if you believe that your business is separate and you have evidence, such as a prenuptial agreement, to prove it, you will need to present this information to your San Antonio divorce lawyer as soon as possible. Otherwise, according to Texas Family Code 3.002, there is a good chance that your business and the income that you have earned from it throughout the marriage is considered community property.

A San Antonio divorce lawyer from Grable Grimshaw PLLC can guide you through the entire divorce process and help you develop an agreement with your spouse regarding the division of your business and other critical assets. Before doing so, we will gladly hire an accountant or appraiser to determine the value of your business to give you an idea of how much you can expect to be split. Our firm’s goal is to make this stressful, frustrating, and overwhelming process as easy and smooth as possible for you. Call our office or submit our contact form to schedule your free, no-obligation consultation today.