What to Consider When Valuing a Business as Part of a Collaborative Divorce

When it comes to dividing an ownership interest in a business in a Texas divorce, there are several options, each with its pros and cons. Even when a couple is taking a less contentious approach through a Collaborative Divorce, a careful evaluation of marital assets for property division, including assigning the proper values to business interests, is essential. The consequences of not doing so could be costly.

The options for dividing up the ownership interest in a business include:

Both spouses decide to continue co-owning the business.

• Pro: While personal goodwill in a business cannot be divided in a Texas divorce, it may be transferrable in a sale of the business at some future date; ideal for spouses who are both active in the business; both spouses can benefit from upside in value
• Con: If the spouses didn’t get along in marriage, it is likely they will not get along as business partners; if one spouse is more active in the business, there is greater potential for mistrust by the “passive” spouse in the way the business is being run.

One spouse buys out the other’s interest (with either cash, note or allocation of other assets within the marital estate).

• Pro: Clean break for both spouses.
• Con: If both spouses have been active in the business, one spouse would have to agree to relinquish ongoing involvement; the purchase price may be adjusted by the acquiring spouse for any personal goodwill; acquiring spouse must have liquidity to pay purchase price or selling spouse must be willing to accept payment over longer term which comes with certain collection risks.

The couple sells the business to a third-party and divide the net proceeds.

• Pro: Personal goodwill value in the business, if transferred properly to the buyer, could be realized as part of the sale and divided; clean break for both spouses
• Con: No participation by either spouse in the ongoing business operations; it could take several months or more to find a buyer for the business; capital gains and other income tax implications

Regardless of the path chosen, it is important to have an accurate valuation of the business on which to base property division in a divorce. The divorcing couple should consult with a valuation professional, particularly when one or more of the following situations exist:

1. One or both parties do not have an idea of the value of the company or their ownership interest.
2. The parties do not agree on the value of the business interest.
3. The business interest makes up a significant portion of the community estate.
4. There is personal goodwill value in the company.
5. There has been a recent change in the company’s performance (e.g. declining revenues or profits, reduced distributions).

A business valuation as part of a collaborative divorce is different from a valuation performed in a litigation setting. Some of these differences include, but are not limited to, the following:

Purpose: In a litigation setting the purpose of the valuation is to assist the court in determining the fair market value of the business or subject interest. In a collaborative setting, the purpose is to help the couple understand and decide on a value for the business that they both agree is fair.

Discovery process: Documents are easier to obtain (theoretically) in a collaborative divorce because the valuation professional has equal access to both spouses. In a litigation setting, especially when the valuation professional is engaged by the non-owner spouse, documents can be difficult to obtain and having an interview with Management can be even more difficult.

Scope of work: In a litigation setting, everyone must follow the Court’s rules on discovery and disclosure and work within timelines established by the Court. In a collaborative setting, there is more flexibility. For example, in a collaborative process, valuators can provide a range of values or a sensitivity analysis on certain key variables. In litigation, the valuator usually provides a single conclusion of value, which considers all three valuation approaches (i.e. asset, income and market) and follows required reporting standards. In the collaborative setting, the valuator can provide a calculation of value, which allows the parties to agree on a more limited scope of work and the valuation approaches best suited for the subject company. Other mutual agreements can be reached related to owner compensation and other adjustments for non-business expenses or non-operating assets/liabilities.

Cost: In a high-conflict, litigated divorce, the process can drag on for months, and more witnesses and experts may be called to testify. In the collaborative process, the couple engages a single, neutral business valuation specialist rather than having each spouse hire a different valuation specialist. Furthermore, a more efficient discovery process, access to information, and flexibility in developing the scope of the engagement generally reduce the cost of performing valuations in a collaborative setting relative to litigation.

If you have questions about business valuation in a collaborative divorce, contact us. We are here to help.

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