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Valuing the Business and Goodwill

If you are seeking a divorce, and you or your spouse own a business, this means valuing the business. Goodwill value also must be determined when trying to value a business. I have written a separate blog series on valuing a professional practice. If you or your spouse owns a professional practice, please refer to that blog series. Here, I will discuss how you can value your business if you are getting a divorce. This article will assist you in splitting up the business as you move on with your life.

Defining The Property

If you want to split up the business, you have two options. You can sell the business to a third party, or one spouse can buy the other’s shares in the business. But first, you need to determine who owns what in the business. In the state of Texas, a business can be defined as separate or community property. If the business was purchased before the marriage took place, or if it was purchased with separate funds, it will be considered separate property. This means that one spouse has claimed to the business. On the other hand, if the business was purchased during the marriage with a joint fund, it will be considered marital property. This means that both spouses have a claim to the business.

Even if the business is considered separate property, it could have community elements due to the marriage. Community elements could come from:

  • The spouse who does not have a stake in the business’s contributions to it.
  • Appreciation in value that took place during the marriage.
  • Additional investments or expansions made with joint funds.

Whether you own the business or your spouse does, understanding if it will be defined as separate or community property is important.

Establishing Business Value

Valuing a business, also known as appraising the business, can be a complex process. Because of this, it is a good idea to hire your appraiser as well as a lawyer. Make sure that both the appraiser and the lawyer are familiar with the financial statements, business tax returns, laws, and documents related to your situation. These parties can walk you through the process and make sure that valuation of the business is done correctly.
Also, an appraiser can determine the best method for valuing the business. There are a few different approaches that you can take. They include:

  • The Market Approach. This is the most common approach, although sometimes the market value is not available to work with. This approach values your property based on the valuation of a similar business that has recently been sold.
  • The Income Approach. This approach uses expected benefits to valuate the business. This includes cash flow and profits. You can use current and past statistics to determine the value of the business in this approach.
  • The Asset Approach. Finally, you have the option of the asset approach. This values the business based on the business’ liabilities and assets (including both tangible and intangible assets).

For more information on how to value a business, please see my articles on valuing a professional practice.

Establishing Goodwill Value

Goodwill value comes from the business’ tangible assets subtracted from the total business value. So, you must determine the business value before you can determine the goodwill value.
In Texas, it is common for you to further divide goodwill into enterprise goodwill and personal goodwill. Enterprise goodwill refers to the goodwill of the business itself. Alternatively, personal Goodwill refers to the value that an individual brings to a company. So, anything that the spouse involved in the business brings to the business is personal goodwill.
I will discuss goodwill value in greater detail in the next article in this series. Until then, if you have any questions regarding splitting up your business in divorce, please contact my office. My firm has worked with cases such as these before. We can answer your questions and help you determine the best course of action for your situation. We are happy to take your call and set up a consultation at one of our Houston locations.

Goodwill and Divorce: Legal Concepts

If you are involved in divorce, there are many factors that you need to consider. One often overlooked factor in divorce is goodwill. In this blog series, I will discuss some of the most important aspects of goodwill and how it relates to you in your current situation.

 

 

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  • Houston: 713.275.7830
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  • Dallas: 469.250.0447