17 Feb What is a business valuation?
Simply put, a business valuation is the process of determining how much a business is worth. This is necessary in the event of a divorce – high net worth or otherwise – because if the business is community property, it must be sold and divided equitably or one spouse must buy out the other’s share. A buy-out can be done with cash or the exchange of an equitable amount of marital property, but without a proper valuation of the business, one spouse stands to lose. A business valuation will generally take into account things like revenue and expenses, the value of any property owned by the business, past and projected growth and goodwill. Goodwill value means the total value of the business minus the total value of the company’s tangible assets. In Texas, the courts split the value of goodwill into two types: “personal” goodwill and “enterprise” goodwill. Personal goodwill is the portion of goodwill directly associated with the person running or otherwise working in the business. For example, if the spouses own a medical practice, and one of them is a well-known, very successful and sought after doctor, a judge may find that the doctor-spouse has a lot of personal goodwill. In Texas, personal goodwill is not marital property and its value cannot be “divided” – it goes with the individual. By contrast, enterprise goodwill is attached to the business itself. If for example, the doctor-spouse left the medical practice, the business still has enterprise goodwill value. Texas courts typically treat enterprise goodwill as marital property that is subject to division between the spouses. As you can tell, business valuations are complex, so having a skilled appraiser perform the valuation is important and is money well spent.