How Business Valuation Works in Texas Divorce Cases
Business valuation in divorce determines what your company is worth so the court can divide marital assets fairly. If you or your spouse owns a business, that ownership interest will likely be subject to division, and getting the valuation right can mean the difference between keeping your company intact or watching years of hard work get split unfairly.
At Varghese Summersett, our family law attorneys have handled complex property divisions involving businesses ranging from single-member LLCs to multi-million dollar enterprises. We understand that your business isn’t just an asset on a spreadsheet. It’s your livelihood, your legacy, and often your family’s primary source of income.
Is Your Business Community or Separate Property in Texas?
Before anyone can value your business, the court must first decide how much of it belongs to the marriage. Texas is a community property state, which means most assets acquired during the marriage belong equally to both spouses, regardless of whose name is on the paperwork.
Under Texas Family Code § 3.003, property owned before marriage is separate property. But here’s where it gets complicated: if your separate property business increased in value during the marriage because of your time, effort, and skill, that growth may be considered community property.
Texas courts call this “active appreciation.” If you worked 60-hour weeks building your company while your spouse managed the household and raised your children, the value you created through that effort likely belongs to both of you.
On the other hand, “passive appreciation” stays separate. If your business grew simply because the market improved or your industry expanded, that increase typically remains yours alone.
Questions That Determine Characterization
Courts look at several factors when deciding how to characterize a business:
When did you start or acquire the business? A company started before marriage is separate property at its core.
What was the business worth on your wedding day? This baseline matters tremendously.
How was growth funded? If community income was reinvested into a separate property business, some of that value may now be community property.
Did your spouse contribute? Contributions don’t have to be direct. A spouse who handled all domestic responsibilities so you could focus on the business may have a claim to the appreciation.
What Valuation Standard Do Texas Courts Use?
Texas divorce courts use “fair market value” as the standard for valuing businesses. This means the price a hypothetical willing buyer would pay a hypothetical willing seller in an arm’s length transaction, where neither party is under pressure to buy or sell.
This standard matters because it’s different from “investment value,” which considers what the business is worth to you specifically. Your company might be worth more to you because of your relationships, your skills, or your plans for the future. But the court doesn’t care about that. They want to know what a stranger would pay for it.
The Discount Debate
One of the most contested issues in business valuation is whether to apply discounts for lack of marketability or lack of control. The spouse who owns the business usually argues for these discounts because they lower the value. The non-owning spouse argues against them.
In a 2023 Tarrant County case, our attorneys represented a business owner whose spouse’s expert applied no discounts whatsoever, inflating the company’s value. By presenting credible expert testimony on appropriate minority interest and marketability discounts, we helped our client reach a settlement that reflected the business’s actual worth in the real world, not a theoretical maximum.
The Three Methods for Valuing a Business in Divorce
Business appraisers typically use one or more of three approaches to determine fair market value. Understanding these methods helps you evaluate whether the valuation in your case makes sense.
The Asset Approach
The asset approach values a business by adding up everything it owns and subtracting everything it owes. Think of it as a snapshot of the balance sheet. This method works well for companies that hold significant tangible assets, like real estate investment firms or equipment rental companies.
For service businesses or professional practices, the asset approach often produces a “floor value” that underestimates what the company is actually worth. A successful law firm or medical practice might have minimal hard assets but generate substantial income.
The Market Approach
The market approach looks at what similar businesses have sold for recently. Appraisers find comparable companies and adjust for differences in size, risk, location, and industry conditions.
This approach works best when good comparable data exists. For common business types like restaurants, dental practices, or HVAC companies, industry databases often provide useful benchmarks. For unique or niche businesses, finding true comparables can be challenging.
The Income Approach
The income approach values a business based on its ability to generate money. Appraisers look at historical earnings, normalize them to remove one-time events or owner perks, and then apply a multiplier or discount rate to arrive at present value.
For small to mid-size Texas businesses, appraisers frequently use a capitalization multiple applied to normalized EBITDA (earnings before interest, taxes, depreciation, and amortization) or seller’s discretionary earnings.
This approach often produces the highest valuations for profitable businesses, which is why the owning spouse’s expert may prefer asset-based methods while the non-owning spouse’s expert gravitates toward income methods.
Active vs. Passive Appreciation: Why It Matters
Understanding the difference between active and passive appreciation can significantly impact your divorce settlement.
Active appreciation is value growth you caused through your efforts. This includes management decisions, marketing initiatives, capital investments, hiring talented employees, and simply showing up and working hard. Texas courts generally treat active appreciation as community property.
Passive appreciation is value growth caused by external forces beyond your control. This includes rising industry multiples, favorable tax law changes, economic booms, and general market conditions. Passive appreciation on separate property typically remains separate.
How Courts Allocate Appreciation
When a separate property business has grown during the marriage, courts must determine how much of that growth came from each source. This usually requires expert testimony and detailed financial analysis.
A common approach establishes the business value at the date of marriage and again at trial. The expert then allocates the increase between active and passive components using both qualitative evidence (what did the owner actually do?) and quantitative modeling (how did similar businesses perform during the same period?).
Key Dates That Affect Your Business Valuation
The date chosen for valuation can dramatically change the result. Texas courts consider several potentially relevant dates:
- Date of marriage establishes baseline value for separate property businesses
- Date of separation may be relevant if one spouse stopped contributing to the business
- Date of service (when divorce papers were filed) sometimes serves as a practical cutoff
- Date of trial gives the most current picture but may reflect market changes unrelated to either spouse’s efforts
Choosing the right valuation date is a strategic decision. If your business has declined since separation, you may want a later date. If it’s grown substantially, you may prefer an earlier date.
Texas courts have discretion in selecting valuation dates, and the choice often becomes a point of negotiation or litigation.
How Business Value Affects Your Divorce Settlement
Once the court establishes fair market value for the community portion of a business, several options exist for handling it in the final division.
Offset with Other Assets
The most common approach awards the entire business to the operating spouse and compensates the other spouse with a larger share of other community assets. If the community interest in your business is worth $500,000 and your total community estate is $1.5 million, your spouse might receive the house, retirement accounts, and other assets totaling $750,000 while you keep the business.
Structured Buyout
When other assets aren’t sufficient to offset the business value, courts may order a structured buyout. The operating spouse pays the other spouse their share over time, usually with interest. This arrangement can strain cash flow but allows the business to continue operating.
Sale of the Business
In rare cases, courts approve or order the sale of the business with proceeds divided between the spouses. This is typically a last resort when neither spouse can afford a buyout and the parties cannot agree on other arrangements.
What “Just and Right” Means
Texas law requires courts to divide community property in a manner that is “just and right.” This doesn’t necessarily mean 50/50. Judges consider factors including length of marriage, each spouse’s earning capacity, who was primarily responsible for building the business, and whether either spouse committed fraud or wasted community assets.
The same business valuation can produce different divisions depending on these factors. A spouse who sacrificed career opportunities to support the other’s business may receive more than 50% of the community estate.
Common Business Valuation Disputes in Texas Divorces
Certain issues arise repeatedly in business valuation cases. Knowing what to expect helps you prepare.
Hidden Income and Underreported Earnings
Business owners who control the books may be tempted to minimize reported income before a divorce. Cash-heavy businesses are particularly susceptible. Forensic accountants can analyze bank deposits, lifestyle expenses, and industry benchmarks to uncover discrepancies.
Excessive Owner Compensation
When normalizing earnings, appraisers must determine reasonable compensation for the owner’s services. An owner who pays themselves $500,000 annually for a role that typically commands $200,000 is suppressing the business’s apparent profitability. The excess compensation should be added back when calculating true earnings.
Goodwill: Personal vs. Enterprise
Goodwill is the value of a business beyond its tangible assets. Texas courts distinguish between enterprise goodwill (which attaches to the business itself) and personal goodwill (which depends on a specific individual’s reputation and relationships).
This distinction matters most in professional practices. A physician’s patient relationships may constitute personal goodwill that shouldn’t be divided. But the practice’s location, staff, systems, and reputation independent of any one doctor would be enterprise goodwill subject to division.
Dueling Experts
Each side typically hires their own business appraiser, and the results can vary wildly. We’ve seen cases where one expert valued a company at $2 million while the opposing expert claimed $5 million. The court must weigh the credibility, methodology, and assumptions of each expert.
Having an attorney who understands business valuation and can effectively cross-examine opposing experts is essential in these cases.
What to Do If You’re Facing Business Valuation in Your Divorce
Protecting your interests requires proactive steps from the beginning.
Gather financial records early. You’ll need several years of tax returns, financial statements, bank records, contracts, and organizational documents. The more complete your records, the more accurate the valuation.
Understand your business’s true worth. Even before hiring a formal appraiser, you should have a sense of what your company might be worth using industry multiples and comparable sales data.
Choose your experts wisely. A credentialed business appraiser (look for CVA, ASA, or ABV designations) with experience in divorce cases and your specific industry will produce more credible testimony than a generalist.
Be honest with your attorney. If there are skeletons in your financial closet, your lawyer needs to know about them before the other side discovers them through discovery.
Think beyond the valuation number. The final outcome depends not just on what the business is worth but on how the court decides to handle that value in the overall property division.
Frequently Asked Questions About Business Valuation in Texas Divorce
Can my spouse take half my business in a Texas divorce?
Your spouse cannot literally take half ownership of your business in most cases. However, they are entitled to their share of the community property value of the business. This usually means you keep the business but compensate your spouse through other assets or a buyout.
What if I started my business before we got married?
A business started before marriage is separate property. However, any increase in value caused by your efforts during the marriage may be community property. You’ll need a valuation at both the date of marriage and the present to determine what portion is subject to division.
Do I need a business valuation expert?
For any business worth more than a nominal amount, yes. Texas courts expect credentialed expert testimony for business valuations. While a business owner can testify to value, that testimony typically carries less weight than formal expert analysis.
How long does business valuation take in a divorce?
A thorough business valuation typically takes 4-8 weeks once the appraiser has all necessary documents. Complex businesses with multiple entities, extensive real estate holdings, or disputed characterization issues may take longer.
Can I get alimony based on my spouse’s business income?
Business income can affect spousal maintenance calculations in Texas. However, Texas has strict limits on spousal maintenance, and it’s only available in specific circumstances. The business’s profitability may be more relevant to property division than ongoing support.
Get Help from an Experienced Texas Divorce Attorney
Business valuation in divorce is too complex and consequential to handle without skilled legal guidance. The decisions made during this process will affect your financial future for years, possibly decades.
At Varghese Summersett, our family law team includes attorneys who understand both the legal framework and the financial intricacies of business valuation disputes. We work with top forensic accountants and business appraisers to ensure our clients’ interests are protected.
Whether you’re the business owner trying to preserve what you’ve built or the spouse seeking your fair share of marital assets, we can help you understand your rights and pursue the best possible outcome.
Contact us today at (817) 900-3220 for a free consultation. We serve clients throughout Texas from our offices in Fort Worth, Dallas, Houston, and Southlake.
