Valuation Theory

Walters Gilbreath, PLLC

If you are filing for a divorce, there are many things that you need to consider. One important factor in divorce that you need to understand is the division of your assets. What are you entitled to in divorce? What is your spouse entitled to? When dividing your assets, there are many that you need to consider and learn about. This includes the division of your business, especially if you or your spouse own a professional practice. The division of this asset is related to Valuation theory. I will discuss this theory in this blog post.

1. What Is Valuation theory?

Valuation theory helps to determine the value of professional practice. When related to divorce, Valuation theory uses historical data to determine value. Any future earnings that occur after the divorce take place will not be divisible between the parties in the state of Texas.

The value of any asset, in this case, professional practice, is measured by that asset’s market value. Market value refers to the amount of money that a buyer would pay to purchase the business. If the asset has no market value, the value is determined by the current owner based on evidence.

2. Measure Of Value

There are a few different types of value to consider when determining the valuation of professional practice. They include:

  • The market value.
  • Intrinsic value.
  • Value to the owner.
  • Book value.

I will discuss these forms of value in greater detail here.

A. Market Value

As expressed above, market value refers to the amount that a buyer would pay for the business. The Texas Supreme Court further defines market value regarding a willing buyer and a willing seller. Both parties involved must be willing and able to buy or sell the property for such an action to determine market value.

Determining marketing value for the purpose of divorce can get tricky. This is because the valuation of a business is often hypothetical. Actual value comes from negotiations between the buyer and the seller. When working in hypotheticals for the divorce, these negotiations never take place. So, the actual value is more difficult to determine. Figuring out the market value, therefore, relies on additional approaches, such as the market data approach, the cost approach, and the income approach.

B. Intrinsic Value

If it cannot determine market value, the court will work off of the intrinsic value of the business. Intrinsic value is only used as a measure of valuation when the market value cannot be determined, or there is no market value. The state of Texas defines intrinsic value in Rosenfield v. White 267 S.W.29 596 as, “The true, inherent and essential value of a thing, not depending upon an accident, place or person, but the same everywhere and to everyone.”

C. Value To The Owner

Value to the owner can also determine valuation in divorce. It refers to the intangible value of the business based on its:

  • Workforce.
  • Systems.
  • Organizational structure.
  • Procedures.
  • Operating assets.

D. Book Value

Book value carries little weight in determining valuation. But, it is still worthwhile to be familiar with this term. It refers to the sum of the asset or practice’s accounts.

3. Valuation Methods

In addition to the above forms of value, there are a few different valuation methods. This include:

  • Adjusted Net Asset Method. This refers to a way to determine total entity value. It essentially uses the market value to determine valuation.
  • Capitalization Of Earnings Method. This approach is based on income. It uses future or current earnings that the business generates to establish the value of the business.
  • Excess Earning Method. Also, consider the excess earning method. It is a method based on assets and income. It states that the total value of a business can be determined by establishing the market value of the business’ intangible and tangible assets.
  • Discounted Earning Method. This is another approach based on income. It uses future earnings to determine value. Specifically, it uses the business’ present value of terminal value as well as the present value of future earnings.
  • Rule Of Thumb Methods. These methods are theoretical. These methods should not be relied on heavily since they deal in hypotheticals and theoretical.
  • Market-Based Methods. Much like real estate valuations, these methods use comparable sales to determine value.
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