When you file for divorce, you have a million things running through your mind. You need to make sure that your children are taken care of. To figure out how spousal maintenance (alimony) will play into your situation. You need to consider the division of debts and assets between you and your spouse. If you or your spouse own a consulting firm, it will be dealt with during the divorce.
But how will the court determine how to divide this asset? Which spouse is entitled to what when it comes to the business? These questions and others get answered through a process called valuation. The valuation of a consulting firm in divorce is something that you should be familiar with. Whether you own the firm or your spouse does, you need to know how it will get valued and what you can receive in divorce. This article will discuss several factors related to valuation to give you the information that you need to succeed during this process.
1. Understanding Valuation Theory
Before we discuss valuation practice, it would help to have an understanding of the valuation theory behind it. The purpose of valuation is to determine the value of a consulting firm. There are many reasons to value a consulting firm, one of which is a divorce. Firm valuation occurs in divorce to help the couple split this asset as they go their separate ways. When valuation gets used in a divorce, it draws on historical data to determine the business’ value. Any future earnings of the business that occur after the divorce takes place will not be divisible between the spouses in the state of Texas. In other words, future earnings remain with the business owners, partners, and shareholders.
The value of any asset, in this case, a consulting firm, 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 gets determined by using another value system. Learn more about these forms of value below.
1A. Market Value
Whenever possible, the value gets measured through market value. Market value refers to the amount that a buyer would pay for the consulting firm. The Texas Supreme Court further defines market value by saying that the amount must get derived from a willing buyer and a willing seller. Both parties involved must be willing and able to buy or sell the property for the market value to stand.
Determining marketing value for the purpose of divorce is not always easy. This is because the valuation of a consulting firm based on market value is often hypothetical. This makes market value differ from the actual value. In contrast, the actual value is only determined after negotiations between the buyer and the seller. When working in hypotheticals for the divorce, these negotiations don’t happen. So, the actual value is more difficult to determine, and the market value figure might not be accurate. Determining market value, therefore, relies on additional approaches, such as the market data approach, the cost approach, and the income approach.
1B. Intrinsic Value
If market value cannot get determined, the court will use intrinsic value to establish the firm’s 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.”
1C. Value to the Owner
Value to the owner can also determine valuation in divorce, but again this only happens if market value cannot get determined. It refers to the intangible value of the consulting firm based on its:
- Operating assets.
- Organizational structure.
1D. Book Value
Book value carries little weight in determining valuation. But, if no other type of value can get determined, book value can apply. So, it is still worthwhile to be familiar with this term. It refers to the sum of the asset or firm’s accounts.
2. Valuation Methods
In addition to the forms of value mentioned above, there are a few different valuation methods. These includes:
- Adjusted net asset method.
- Rule of thumb methods.
- Excess earning method.
- Capitalization of earnings method.
- Discounted earning method.
- Market-based methods.
To determine which method is right for your situation, contact an attorney.
3. Valuing Your Business
Generally, in divorce, the valuation of your business happens in court. This usually happens by a trial by experts. Some experts who might be involved in your case are those with the following credentials:
- Accredited In Business Valuation (ABV).
- Accredited Senior Appraiser (ASA).
- Certified Business Appraiser (CBA).
- Certified Valuation Analyst (CVA).
Make sure that those handling your case are properly qualified. This can make sure that your firm gets valued correctly.
Also, you can present documenting evidence in court. Be careful when presenting this evidence in court. The other party in the divorce can use your evidence against you, so make sure that this won’t happen before you enter it into court. A lawyer can help you determine what type of evidence will help or hurt you in court. You can present the following documents as evidence:
- Original purchase documents.
- Personal property tax rendition records.
- Corporate balance sheets.
- Corporate minutes.
- Sales forecasts.
- Financial statements.
- Representation of values to third parties.
- Tax returns.
- Buy-sell agreements.
- Stock transfer ledgers.
- Partnership agreements.
- Previous litigation.
- Market studies.
- Loan applications.
- Trade association literature.
- Insurance policies.
- Business interruption.
- Underwriters’ reports.
- Equipment leases.
- Real estate leases.
- Real estate tax records.
- Record replacement insurance.
- Offers to sell or buy.
Profit and loss statements
4. Issues in Valuing a Consulting Firm for Divorce
Valuing a business during a divorce is not always easy. There are a few different issues that you might face as you go through this process. Here, I’ll discuss some of the most common ones.
4A. Transfer Restrictions
Many corporations have bylaws that restrict the transfer of interests or shares. In divorce, this can have implications for the spouse who is not involved in the firm. One important question to ask in divorce is if these bylaws apply to the non-involved spouse or not. Both spouses should be aware of how these bylaws and transfer restrictions will impact the divorce. Every situation differs based on the consulting firm’s specific agreements and bylaws. You should consider whether the non-involved spouse signed agreements that allow restrictions on transfers. Also, consider the nature of any agreements signed.
4B. Buy-Sell Agreements
Many partnerships also contain buy-sell agreements. These agreements are between shareholders and partners. They are meant to protect these parties and make sure that the firm is well run. These agreements also generally include information regarding the buying and selling of stock or interest.
These agreements can affect divorce. In most cases, these agreements get triggered by divorce. If the non-involved spouse signed the agreement, they have a say in these agreements. Texas caselaw that a buy-sell agreement defining the value of the business’s interest limits the value of the interest that may be awarded in the divorce.