Frequently clients ask about their Dallas Texas divorce why we have to get a forensic CPA expert to value their closely-held business to get them divorced.
In Texas, there are three parts to dividing property in a divorce:
- Characterization — is the asset community property (property obtained during the marriage) or separate property (property owned before the marriage or through gift or inheritance)
- Valuation — assessing the value or net worth of each asset to assist in determining what is a fair division of property
- Division — the physical aspects of sorting assets to each party
In order to dispense a "just and right division" of community property in a Texas divorce, the judge has to know how much each asset is worth. In other words, until each asset has a dollar value, neither the judge nor the parties can know whether the division awards 50% of the assets to each party or some other figure.
In a divorce with a business interest, the first step is to decide whether the business entity is community property. This can be more complicated than just whether the business was started during the marriage. Important questions include what was the source of funds used to start the business, did the business change formations during the marriage, and whether any community funds were put into the business during the marriage if the business was started before the marriage. Also, consider whether the customers of the business come to the business due to the reputation of the business or the reputation of the spouse/owner.
Then the business must be valued according to appropriate principles to be used during a divorce. In the market valuation approach, the CPA estimates your business’s value by comparing it to a similar business that has been sold recently. The income approach estimates the value of the business by converting profits or cash flows into value. The asset approach estimates the value based on the values of the assets and liabilities of the business. Note: the "book value" of a business, which is the assets minus the liabilities on the balance sheet, is not a valuation method used by professional business valuators.
Not just any CPA is qualified to conduct a business valuation in a Texas divorce. The expert should be certified by the American Institute of CPAs in Business Valuations. The letters after the CPA’s name should read "ABV". This accreditaion assures the divorcing spouse that the CPA has a minimum level of expertise in the relevant principles of valuation. If an expert is under-qualified to give an opinion on valuation of a business, the expert may not be allowed to testify at trial.