Asking a business owner what their business is worth is like asking a parent how beautiful their child is. The answer is going to be different from one day to the next, and it is never going to be objective.
The value of a family owned business is one of the issues most often and most bitterly fought over during a divorce. That is for good reason. Most successful business owners and their close family members truthfully don’t know what their business is worth, even if they think that they do, and even if they have recently applied for a loan. This is because there are multiple generally accepted methods of determining the value of a business, and a lot of different rules to apply.
The value of a family owned business is one of the issues most often and most bitterly fought over during a divorce.
The easiest method of valuing a business, is to look at the assets which belong to it, and subtract the debts. This is also known as “book value”. However, this method gives no credit to the value of the going concern of a business. How about contracts the business has to perform work in the future? Those are worth something, but they also require the performance of the work, so they are not worth as much as the same amount of cash would be.
What about valuing a business based upon its income stream? I have heard it argued that a business is worth three times the value of the annual net, I have also heard an argument for valuing the business at the amount that would have to be invested to generate that much income.
What about the time and labor of the business owner? Texas courts have stated that the value of a business does not include the labor of the owner. You don’t split the business owner’s future wages in a divorce, just the value of the business. If a dentist makes the same amount from his own practice as he/she would receive if they accepted a job with a bigger company, there is a good argument that the business has no value at all. All the future income is just the dentist’s future salary, which the ex-spouse is not entitled to.
You don’t split the business owner’s future wages in a divorce.
The ex-spouse is also not entitled to the “good will” of the business owner. This means the increased business that comes because THAT owner is there. Looking again at a dental practice, how much of the business is because everyone knows there is a dental office at that corner, and a lot of people have the number already programmed into their phones, and how much of the business is there because patients really want to see THAT dentist.
It is difficult to determine a value. In most cases, a professional is hired to do it. Sometimes the husband’s professional and the wife’s professional are pretty close, or the two spouses choose to hire one professional together and abide by whatever the determination is. Sometimes, we go to court, and the two professionals get on the witness stand and explain why their model is correct, and what the other professional is doing wrong and the judge makes a decision.
The earlier it is recognized that a divorce will go to trial, the less painful and expensive the process is going to be.
Determining the value of a family business can be especially heated because Texas has very limited alimony, and child support is tightly controlled. This means that in a divorce between a high wage earner and a stay at home parent, frequently the only method available for the stay at home parent to receive a continuing stream of income capable of sustaining a household of any size, is by placing a high value on the business.
So how can a case be settled if the real problem is that the spouse who does not run the business is desperately afraid that he/she will be on the verge of homelessness without that income stream? I have gotten good and early settlements on many cases where it did not seem possible by addressing the real fear directly. Sometimes I suggest that an income stream be offered instead of assets. Sometimes a much lower overall settlement will be accepted if it comes in the form of payment for a few years’ tuition, and a guaranteed place to live. And sometimes, the only way to the end of the divorce is to have a trial, because one of the parties is never going to be reasonable, and what they really want is a day in court. If that is the case, the earlier it is recognized, the less painful and expensive the process is going to be.