In Texas, few issues are litigated more hotly than the valuation of closely held businesses and professional practices. When facing a divorce, spouses often assume that the value of publicly traded stocks will be easy to determine. The truth is nearly the opposite. An important question to ask is, how is a closely held business or professional practice valued in a divorce?
With closely held businesses and professional practices, courts depend on financial professionals, competing methodologies, and a flurry of supporting evidence to decipher how Texas divorce laws apply to a business interest.
Community Property Presumptions
Texas is a community property state. Texas Family Code § 3.002 creates a presumption that a business interest acquired or grown during marriage is community property. Under Code § 7.001, business owners who are married must understand that any income growth or asset appreciation while married may need to be split “justly and fairly,” even if they owned the business before their marriage.
According to the CDC, the marriage rate in Texas is 5.8 per 1,000 population. The divorce rate was 2.1 per 1,000. Additionally, the fertility rate is 60.6 births per 1,000 women aged 15-44.
Typical Valuation Methods
Valuation professionals typically apply one of three approaches. The income approach forecasts the company’s ability to generate earnings and cash flow. Under the market approach, valuators analyze similar businesses that have sold.
Finally, the asset-based approach discounts the company’s total assets minus liabilities. The process of assigning value to professional practices regularly raises disputes about whether personal goodwill or enterprise goodwill should be considered.
Professional witnesses and forensic accountants present their cases before seasoned judges at the Travis County Civil and Family Courts Facility, which is located at 1700 Guadalupe Street in Austin, Texas, under 78701.
Enterprise vs. Personal Goodwill
Understanding goodwill is key to valuing professional practices. Courts in Texas generally divide goodwill into two categories: personal goodwill and enterprise goodwill. Personal goodwill is attached to the professional and is not divisible in divorce. Enterprise goodwill, by contrast, is property of the business itself. As you might imagine, getting to that distinction can become wildly disputed.
Discovery Matters
Preparing to value a business requires tons of discovery. You can expect tax returns, profit and loss statements, payroll records, compensation comparisons, and operating agreements to all be scrutinized. Forensic accountants can help provide supporting evidence and documentation. Since both parties typically hire separate professional witnesses who will review financial data and produce vastly divergent valuations, the credibility of their findings becomes crucial.
Hire a Divorce Lawyer Right Away
Valuation strategy should start as soon as possible. Attorneys who represent clients early in complex asset cases are better equipped to challenge unreasonable valuations or uncover hidden income manipulation before trial.
The Law Office of Ben Carrasco, PLLC, is a family law-only practice located in Austin, Texas. We represent clients in high-net-worth divorces involving closely held businesses and professional practices. Ben Carrasco is Board Certified in Family Law. He personally handles every case before the Travis County family courts. Contact us today for a consultation.
