Did you know that businesses with fewer than 500 employees account for over 99% of all employer firms in the U.S.? And, very small businesses with fewer than 20 employees account for half of the country’s nonfarm GDP and have generated 60-80% of the net new jobs over the past decade?
For the entrepreneur of a small company the family business is another asset in the marital estate that is subject to division upon divorce in Texas. Once the entity is evaluated by a forensic CPA and a value assigned to the community property portion of the asset, the typical division will provide a lump sum payout to the uninvolved spouse at the conclusion of the divorce.
A business consists of tangible assets like buildings, bank accounts, inventory, tools, furniture, and the like; but also, a business has intangible assets such as mortgages, leases, labor, accounts receivable, and goodwill. Valuing the goodwill of a business presents its own complexities because of the distinction between the goodwill of the enterprise versus the goodwill of the owner.
Enterprise goodwill is the capacity of a business to attract new customers or keep old ones due to great locations, reputation for superior service or skill, or anything else that influences customers to continue a professional relationship. Personal goodwill describes the nontransferable ability of an individual to attract and maintain customers due to his or her particular reputation. The goodwill of the enterprise can be considered in the valuation of the entity; whereas, the goodwill of the owner belongs to the owner himself or herself and is not a marital asset.
Another issue in valuation of a business is whether the spouse owner has control over the entity – whether he or she has to share power or decision-making authority. Thus, the value of the entity can be reduced based on a discount for lack of control over the entity.
Another discount that applies to the valuation of a business entity in a divorce is the discount for lack of marketability. In other words, the valuation isn’t being performed between a willing buyer and a willing seller and, in some cases, can’t be sold easily.
Business valuations are usually performed in Texas divorces by a CPA who is Accredited in Business Valuation, a Certified Business Appraiser, or someone recognized by the American Society of Appraisers. Regardless, the expert must be familiar with the nuances of Texas divorce laws as applied to business entities as a marital asset.