How to determine the value of your business in a Texas divorce

On Behalf of | Aug 2, 2023 | Divorce, Property Division

Property division becomes more challenging when you and your spouse own a business or business shares. The most logical thing to do would be to buy out your spouse so you can maintain ownership. But first, you must know how much you will pay your ex to keep the business. Here are approaches you can use to determine the value of your business.

The asset-based approach

In the asset-based approach, you must identify and gather all the business assets and establish the value of those assets. Usually, these include the accounts receivable, liquid business assets, equipment, property and other assets the business uses for operations. After calculating the total worth of the business assets, you subtract the current liabilities to determine the value of the business.

The market-based approach

The market-based approach is a method you can use to determine the fair market value of your business. It seeks to discover how much the hypothetical business owner can sell their business to a hypothetical buyer if neither was under unreasonable pressure to buy or sell the business.

Basically, the market-based approach will calculate the value of your business by comparing your business transactions to similar businesses in a related market. Because business transactions are rarely identical, you or a professional valuator must know when to adjust the value appropriately and proportionately.

The income-based approach

The income-based approach determines a business’s value based on its income potential or capacity to generate income. It involves analyzing the present value of the company’s future earnings and cashflows to make predictions and merge them into one current capital value. You or a professional valuator can use the cash flow predictions after adjusting the value to account for changes in inflation, growth rates, taxes and cost structure. In short, the income-based approach uses economic statistics to forecast the value of the business today.

Determining the value of a business can involve other approaches and considerations. Sometimes, you might even use more than one method. As a business owner, you should ensure the price is right.

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