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Marital divorces are often difficult under the best of circumstances, but tensions may be even higher when the marital estate includes substantial interests the married couple own jointly in private companies, which they are seeking to divide in their divorce proceeding.  The issues likely to create conflict include (i) determining the fair market value of the business(es) included in the marital estate, (ii) negotiating the amount one spouse will pay to acquire the interest that is held by the other spouse in the business, and (iii) negotiating the payment terms to acquire this spousal interest. This post reviews options for spouses to consider that will help them reach an objective value of the private company interests they have and divide these interests in a manner that prevents their divorce from dragging on for years at great expense. Adopting some of these options for resolution, however, would require the spouses to agree to adopt an outside-the-box approach to their divorce settlement. 

Preparing for a Successful Business Divorce

The planning process for a business divorce in a marital case involves securing a number of business and financial records the parties will have to exchange. Before they can negotiate a divorce settlement that involves a division of their ownership interests in private companies, they need to confirm the ownership of the business (identify all owners), review the governance rules that apply, obtain financial information about the company’s performance that will enable them to determine the value of the company, and assess the financial resources available in the marital estate. In this planning stage, the parties will want to focus on the following issues:

  • Were there previous valuations that were conducted of the business, internally and externally by third parties, and were written offers for sale (term sheets, letters of intent) to buy the business made to the company/owners in recent years?
  • Do any buy-sell or other similar agreements exist between the company and/or the partners that provide an agreed method to calculate the value of the business?
  • Who are all the partners in the business, and if there are other partners, are there restrictions on transferring interests in the company’s governance documents that require other partners to approve transfers between spouses?
  • Are there sufficient assets in the marital estate to support an immediate buyout of the interest held by one spouse in the business, or will the couple have to negotiate the terms of a structured payment for the spousal interest?
  • What is the level of debt on the business, i.e., if the business is wholly owned by both spouses, is it possible for the business to secure sufficient financing to enable a buyout of the interest held by one spouse in the business?

Determining the Value of Spousal Interest in the Business

In a marital divorce, the ownership interest the couple holds in a private company may be their most valuable asset. Therefore, negotiating the price to be paid by one spouse to acquire the interest in the business held by the other spouse may be one of the most contentious aspects of their divorce. Determining the value of a company may seem like a simple exercise, but valuing a business involves considering many different variables that can lead to large variances between experts regarding the value. Further, the spouses have opposing goals with the spouse who is transferring his/her interest desiring a high value for the business and the spouse who is paying for the spousal interest desiring a low value to apply to the business.

Both spouses likely share the goal, however, of avoiding a protracted dispute over the value of the business, which will then become a battle of the valuation experts, and result in high legal and expert fees that require a lengthy time period to resolve. When the spouses share the goal of reaching a prompt, cost-effective and fair agreement regarding the value of the company on an objective basis, the following are some options they may want to consider:

  • Retain Single Valuation Expert – The spouses could jointly retain a single business valuation expert who they both respect and agree that they will be bound by this expert’s report on the company’s value and the transfer price to be paid. They could also request the valuation expert to consider the company’s financial performance over the past three years to determine its value, i.e., they could attempt to have the company’s value based on what amounts to a three-year average.
  • Retention of Multiple Valuation Experts – Each spouse could retain their own expert to prepare a valuation report, and if the values determined by the two experts are more than 10% apart, they could agree these two experts would then select a third expert, and they would agree to be bound by the value determined by the third expert. Alternatively, they could agree that after the third expert issues his or her valuation report, the company’s value will be based on the average value of all three reports or an average of the two reports that are closest together in value. Thus, the couple is agreeing to allow the third expert to establish the value of the company, and to be bound by that determination.
  • Arbitration of Company Value – The couple could agree they will authorize the value to be decided by an arbitration panel at a timely hearing, i.e., they could set a date for an arbitration hearing to be held in 90 days, which would allow for them to each secure reports from their own valuation experts. The spouses would submit their valuation reports (and any related testimony) to a panel of arbitrators to decide the company’s value. The panel could also decide the specific structure for payment of the transfer price to be paid by the acquiring spouse if the couple cannot agree on the payment terms. 

Additional Creative Options to Consider

In addition to the approaches discussed above for determining the value of the company (or companies) at issue in the divorce proceeding, there are some other, more creative options that are also available for the spouses to consider, but that will require them to accept less common/traditional settlement structures. These options are reviewed below.

  • Company Value Determined by Trusted Advisor(s) – Rather than directly retaining the business valuation expert themselves, the couple could retain a single trusted advisor or appoint a committee of three advisors and task them with determining the company’s value. This sole advisor or panel of advisors could also be retained to set the terms for payment of the transfer payment/price. Thus, the couple would turn this decision over to a trusted individual or group to retain the valuation expert, oversee the determination of value, and establish the payment terms for the transfer of the spousal interest.
  • Defer Payment Until Company is Sold – Rather than transferring the spousal interest in the business from one spouse to the other at the time of the divorce as is customary, the couple could agree to each retain their ownership in the company after the divorce. This continued ownership, however, would be with the stipulation/agreement that the business will be sold in the next five years and the couple will split the net sales proceeds at that time. In this scenario, the couple will need to discuss what division of the sale proceeds is appropriate on a post-sale basis. In most cases when the transfer of the spousal interest takes place at the time of the divorce, the parties will agree, or the court will require the parties to split the value of the business on a 50-50 basis. But if the couple continues to own their interests in the business after the divorce, they may negotiate a different split that takes into account either the appreciation or the decline in value of the business when the sale of the business takes place years after the divorce. Importantly, when the couple continues to jointly own a company after their divorce is final, they will also need to take steps to create transparency, including providing the non-operating spouse with periodic financial reports. They also need to include restrictions on the powers of the operating spouse that adequately protect the interests of the non-operating spouse. By way of example only, during the holding period before the business is sold, the operating spouse cannot declare large bonuses for himself or herself and cannot add new owners that would dilute the ownership interest of the non-operating spouse.  
  • Grant of Options to Exercise in the Future – Another option, which is similar to the one above, is one in which both spouses continue to own the business after the divorce is final. In this scenario, however, each spouse receives an option to exercise in the future, perhaps in three years or five years. Specifically, the spouse operating the business would have a “call option,” providing that he or she can purchase the interest held by the other non-operating spouse when the option is exercised. The non-operating spouse would have a “put option” that would allow him or her to trigger the option and require the operating spouse to purchase his or her interest. The company would have to be valued at the time that the option is exercised by either spouse, but they could agree on a specific formula in their settlement agreement to determine the value of the business at the time the option is exercised. Finally, and similarly to the previous option, the couple will need to include transparency regarding the company’s ongoing financial performance, as well as restrictions that protect the non-operating spouse during the holding period.


Divorces can be stressful, and the conflicts involved may be heightened when the couple jointly owns valuable interests in private companies. Determining the value of the business and the terms for payment of the spousal interest can be a challenge, because so much is riding on the outcome. But, having this conflict over the value of the business can become a protracted battle that will be very expensive and time consuming, which is not good for either spouse or for the business. If the couple is willing to be creative in their approach to the valuation of the business, however, there are options available that will provide them with a path for the division of their ownership interests in private companies in a manner that is objectively reasonable to both of them. 

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We accept that beauty is in eye of the beholder but determining what a private company is worth should be much more objective. Yet, for a business owner who is considering a sale of the company, it may come as a surprise that the methods commonly used by valuation experts to determine the company’s value can lead to widely varying amounts. Business owners should definitely crunch the financial performance numbers when they are considering a sale, but there are a number of other factors that are at play regarding company valuation, as well, that business owners should also evaluate in effort to maximize the final sale price of their business.

Business Valuation Methodologies

Business valuation experts typically rely on three different types of analysis when they are attempting to determine the market value of a private company.  They will consider (i) the current value of companies comparable to the company being valued, (ii) the price at which other, similar companies have been sold, and (iii) the value of the business based on a discounted cash flow analysis. They will also consider the value of the assets of the company, i.e., what a liquidation value would look like. Once all this information has been gathered, they will combine the results of these varied outputs to come up with a total value for the business. 

Speaking in layman’s terms, what the valuation experts are doing is looking at what other companies are trading for (commonly referred to as trading multiples), considering what other companies are selling for and calculating what a company is worth based on what its projected cash flow will be on earnings that are generated in future years, and then discounting these future cash flows back to present value. The DCF analysis is the most detailed and also involves the greatest number of assumptions that are made by the valuation expert.

Reviewing these various valuation methods helps to explain why the experts’ conclusions of value can vary so widely. More specifically, in their efforts to determine value, the experts try to put companies into similar buckets. But they also make different assumptions about both the company and the industry, and they apply discounts they consider appropriate. The variables they consider include their projections as to the company’s future earnings and regulatory and other significant challenges the industry may be facing, along with any issues that are particular to the company being valued, such as management turnover, expiring patents, additional competition and client concentration. All these factors and applied discounts can lead to a wide variation in the ultimate value that different experts will apply to the business. 

With this backdrop, business owners need to appreciate that valuation reports should be used for guidance only, and they provide no assurance that the valuation amount will be close to the purchase price that can or should be paid to buy the company. Potential buyers will develop their own company valuations, and they will determine the purchase price based on their independent analysis of the company’s performance and assets. Further, the amount they will agree to pay for the business may be based, at least in part, on what they project that the business will be worth in the future, i.e., what they believe they can do to improve the company’s value after they purchase the business. This last factor transitions us to the remaining portion of this post.

Unlocking Value Not Reflected on the Balance Sheet

The company’s valuation is based on objective data about its performance, including its revenues, expenses, profits and liabilities, including bank debt. Therefore, for a business owner to secure the top purchase price for the company, the presentations that the company makes to potential buyers also need to include reference to other assets that the company may have that are not reflected on it balance sheets. The company’s other valuable, non-balance sheet assets may include one or more of the following:

  • Trade secrets – Existing patents are disclosed on the selling company’s balance sheets, but many types of valuable intellectual property are not patented. These trade secrets could include internal operating processes, pricing strategies, formulas used in manufacturing or production, the identity and output of vendors/suppliers located in foreign markets, and long-term contracts that exist with customers and/or suppliers on favorable terms.
  • Stability of employees and non-compete agreements – The selling company may have a stable work force and may also have key employees who are subject to tightly drafted non-compete and non-solicitation agreements. This may provide the acquirer with a less risky acquisition that may enhance the amount of the purchase price.
  • New business opportunities – The selling company may have identified and evaluated specific new business opportunities, including potential acquisition targets that could be highly desirable and valuable to the acquiring company. The selling owner may not have been in position to pursue these additional opportunities due to capital constraints and/or other challenges, such as retaining key new employees in other markets. 
  • Expansion opportunities – The selling company may have options to expand to nearby property at favorable pricing. This could be of great value to the acquiring company, which would not have to incur the expense of finding and acquiring new property and the heavy expense of having to relocate the business in order to expand.

Finding the Right, Strategic Buyer

Business owners will achieve the highest sale price if they are able to sell the company to a strategic buyer — a buyer that is doing business in the same industry and that is acquiring the company to build on the synergies between them. These synergies will enable the acquiring company to more rapidly expand its services or product lines, provide new markets for the existing business, and build value more quickly. The acquiring company invariably will also want to reduce overhead and enhance the profitability of the merged companies by utilizing its existing staff to handle things like accounting, billing, payroll, and health insurance.

The obvious question then is how to locate and then attract these strategic buyers. The importance of bringing strategic buyers into the mix is why selling companies often hire business brokers or, if the business is large enough, investment bankers to help them locate buyers and help run the due diligence process before a closing takes place. These third-party consultants can be an invaluable resource in positioning the business for sale and in securing a favorable purchase price. But the business owner should not simply offload the sale of the company to a third-party professional. As one example, the business owner remains important in suggesting potential acquisition candidates to bring to the table, who may be competitors, vendors or clients. 

Further, the business owner needs to help develop the story to be told in regard to the sale.  This is important, because potential buyers will want to know why the business is being sold at this time, why the owner believes the business is an attractive candidate for sale, and the specific role the owner expects to play in the business, if any, after the sale. The sincerity and conviction that the owner provides in answering these questions are likely to play an important role in securing a sale, as well as in obtaining the best price to be paid for the business. 


For a business owner considering the sale of the business, securing a third-party valuation of the company is just one step in the process. To maximize the company’s value upon sale, the owner needs (i) to develop a compelling story explaining why the business is being sold, (ii) evaluate all off-balance sheet assets that add value to the business and, finally, (iii) identify potential strategic buyers who are willing to pay the highest price for the synergies obtained in acquiring the company. A business owner who approaches the company for sale this way stands the best chance of securing the most favorable purchase price. 

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It may be a reflection of summer’s lazy days or a simmering frustration that has built up over time, but it is not uncommon for a majority owner or a minority investor in a private company to decide the time has come to separate from his or her business partners. The majority owner may wish to remove the minority investor from the ownership group, or the investor may have become disenchanted with the owner and want to exit the company.  In either case, there are key issues for business partners to consider before they start down the road toward a business divorce, and this post highlights important issues that will likely arise in this process.

The Governance Documents: Do They Include a Buy-Sell Provision?

The starting point for a business divorce is a close review of the company’s governance documents. Neither the majority owner nor the minority investor can trigger a redemption unless they have a contractual right to do so. If there is a buy-sell agreement or some other form of a “corporate prenup” in place, it may be in the company agreement of the LLC or in the bylaws of the corporation, or it could be set forth in a separate shareholders’ or owners’ agreement. But if a buy-sell agreement does exist, it will spell out how the redemption of the minority interest can be triggered by either party, the process for valuing the minority interest, and the payment structure for the purchase of the interest.

When there is no buy-sell agreement in place, the majority owner does not have a contractual right to redeem the minority investor, and the investor has no ability to contractually require the owner to purchase his or her minority interest. An exception to this rule may exist for the majority owner, however, in the company’s governance document. Specifically, if the majority owner has the right to amend the governance document, this right of amendment may include the right to add a buy-sell provision. This is likely the case if the governance document does not require unanimous consent or does not have a supermajority provision that allows the investor to block the amendment. In the absence of a blocking right, the majority owner can amend the governance document to include a new right to redeem the minority interest.  

From the minority investor’s perspective, if no buy-sell agreement exists, the investor can attempt to negotiate a voluntary buyout with the majority owner or wait for a liquidity event that will allow for a redemption to occur. The minority investor can also evaluate pursuing potential against the majority owner for misconduct, but the investors’ rights are generally limited in this regard to recovering monetary damages. Since the Texas Supreme Court’s decision in Ritchie v. Rupe in 2014, even when a minority owner is able to show that the majority owner engaged in shareholder oppression, Texas courts lack the power to award a buyout of minority investor’s interest based on this finding. Similarly, in the fiduciary duty context, no Texas court has ever held that the forced buyout of a minority investor is a remedy that is available to the investor based on a majority owner’s breach of fiduciary duty.

Minority investors who do not have a buy-sell agreement to enforce may seek to obtain an involuntary dissolution of the company based on the Texas Business Organizations Code (TBOC). Under Section 11.414 of the TBOC, a dissolution is authorized if a district court concludes that one of the following three conditions exist: (1) the company’s economic purpose is likely to be unreasonably frustrated, (2) the majority owner has engaged in conduct that makes it “not reasonably practicable” to carry on the business with that owner, or (3) it is no longer reasonably practicable to carry on the company’s business in conformity with its governing documents (see Section 11.314). These are difficult legal standards to meet, however, and to date, this section of the TBOC has never been applied to an LLC. Thus, it will be difficult to obtain a court-ordered dissolution of a successful, ongoing business, and the dissolution remedy is not likely available unless the company is a corporation or partnership.

The takeaway here is that both majority owners and minority investors are best served by negotiating and then adopting a buy-sell agreement at the outset of their business relationship. A buy-sell agreement enables the majority owner to secure a redemption of the minority investor when desired, and it allows the minority investor to trigger a buyout of its interest when the investor is ready to exit the business. Our discussion of the critical terms of buy-sell agreements is available at this link.

Determining the Value of a Minority Interest

If there is a buy-sell agreement in place, it will govern the process for determining the value of the interest held by the minority investor. The key focus here is likely to be whether the valuation will or will not include what are termed minority discounts. These are discounts that typically apply in the valuation of minority interests in private companies based on the facts that (1) minority investors do not control the business (lack of control discount) and (2) typically, the company’s governance documents impose onerous restrictions on the transfer of minority-held interests (lack of marketability discount). These two minority discounts are steep, and together, they often result in a reduction of the value of the minority interest by 40% to 60%.  

If there is a buy-sell agreement and it is silent on whether minority discounts apply, it may refer to using “fair market value” (FMV) as the standard for determining the value of the minority interest. Valuation experts would likely view the FMV standard as one that includes application of minority discounts to the valuation, because it refers to what a willing third-party seller would pay a willing buyer for the minority interest. A third-party buyer who is considering the purchase of the minority interest when it is subject to lack of control over the company and lack of marketability would insist on applying these discounts to the purchase price.

The issue of valuation is another reminder that a buy-sell agreement should be negotiated when the minority investor acquires an interest in the company. The point of entry is the time to ensure that each of the parties’ respective views about minority discounts is addressed. 

Payment Terms and Security for Payment

Even when a buy-sell agreement exists, it is very rare for it to require that payment of the full price be made at the closing of the purchase of the minority interest. Much more commonly, the purchase price is paid out over a period of years, and the agreement may also provide for the investor to have some type of security if there is a default in payment. Generally, this will allow the investor to have some right of foreclosure to regain a portion of the interest in the company. 

A minority investor attempting to secure a voluntary buyout when no buy-sell agreement exists may need to consider creative ideas that appeal to the majority owner. One option is a sale with a carried interest, which provides the majority owner with a discounted purchase price. In this scenario, the investor accepts a lower sale price, but the investor is also potentially entitled to receive an additional payment depending on future events. As one example, the minority investor could accept a purchase price equal to 75% of the market value of the minority interest but would also receive a future payment tied to a formula if the company is sold within three years, or if no sale takes place, the investor could receive an additional payment that is based on an increase in the company’s revenues during this period. This is just one example, but when a minority investor cannot enforce a buy-sell agreement, the investor will likely need to be creative in efforts to secure a buyout from the majority owner.


Breaking up is hard to do for business partners, and that is particularly true when they do not have a partnership exit plan in place as documented in some type of buy-sell agreement. In the absence of this type of corporate prenup, the parties would have to agree to a redemption on a voluntary basis, which may not be possible if the partners have become adverse to each other.  Given the importance of a buy-sell agreement in lessening conflicts when a business divorce takes place, business partners who do not have one, but who are currently on good terms with each other, may want to consider adopting a buy-sell agreement after the fact. Creating a path providing for a partner to depart the business by agreement is truly in both parties’ interests.