Houston lawyer: How to navigate business valuation and divorce in uncertain times

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Divorce is never easy, but here's how to navigate it with your business in mind. Photo via Pexels

We all hoped that, once the pandemic had waned, we would return to a more normal, predictable economy, but it seems that we are confronted now with even more unpredictability in what economists have dubbed the “uncertainty economy.” Very few people are able to choose the best time to divorce on the basis of finances, but the current environment can make evaluating the worth of stock options, a closely held business or even real estate highly challenging.

For one thing, the pandemic itself lingers. Some businesses—bicycle manufacturers and bicycle shops, for instance—experienced boom times during the pandemic. Other businesses—restaurants and businesses at tourist locations, for instance—suffered greatly, limped along, or even closed for good. Now, instead of settling into a steady hum again, our economy is coping with inflation, the rising cost of labor, supply chain tangles, and the ripple effects of the war in Ukraine and sanctions against Russia. The situation is still fluid. What works today may not work well tomorrow. What doesn’t look promising today may be much more successful tomorrow.

In a divorce case in which significant financial assets are involved that are community property, a family lawyer will bring in a trusted professional business or property evaluator—whatever is appropriate for the particular situation. Evaluating a closely held business is often the most difficult issue—more difficult than, say, dividing the value of real estate or stock in a publicly traded company. Three different methods can be applied to a business valuation: the market approach, the income approach, and the asset approach. The business evaluator will judge which to use, singly or in combination.

Much will depend on the ownership agreement as expressed in formation documents, whether the owners be investors, business partners or family members. These documents generally provide in some way for what will occur in the case of a divorce or a death. Generally, co-owners do not want to have to deal with an inexperienced ex-spouse or widow/widower who abruptly becomes part-owner of the business or practice (in the case of a doctor or lawyer in a partnership). The spouse who is in the business also has to consider tax issues and his or her fiduciary duty to other owners. And courts are not allowed to simply give corporate assets or debts to one party or the other in a divorce.

Generally the spouse involved in the closely held business will have three choices available: continue to own the business with the ex-spouse (maybe they already work together and have a decent working relationship), sell the business and divide the profits, or offset the value of the business ownership with other property if other assets are available. In Texas, “personal goodwill” as part of a business is not community property. It attaches to the person who created it. But the business may have “enterprise goodwill”--the value of the business apart from the individual owner--which may be community property.

None of this addresses the issue of the fluidity in the current economy. Divorce agreements can allow for that in the form of contingency agreements. For example, a business owner may be dealing with a specific potential liability. The divorce agreement may provide that, for a given period of time, the business owner is allowed to set aside a certain amount of money to address the liability if it arises. If it does not arise, after a certain period of time, the money will be divided between the two former spouses. Or let’s say a business asset with limited liability or future involvement that is part of community property may be sold in the future. A divorce agreement can provide that, if the asset is sold, the profits will be shared. Clawback provisions can be included, as well, to provide for future adjustments. This will require extraordinary drafting skill.

There is another option as well and that is to wait for more settled times. But the two spouses may have radically opposed views as to the “best” time for the divorce. The spouse who earns less may want to divorce when community property values are at their highest; the other spouse will want to split when community property values are at their lowest. In either case, they would do well to consult experts in family law and business valuation experts before deciding on when to set a divorce in motion.

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Susan Myres is a Houston-based, board-certified family law attorney at Myres & Associates and has over 35 years of experience.

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Growing Houston startup moves into 43,000-square-foot facility amid 'hypergrowth phase'

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A Houston startup has moved into a new space that's more than four times larger than its previous setup — a move that's setting the company up to scale its business.

NanoTech Materials celebrated its move into a new facility — a 43,000-square-foot space in Katy, Texas, this week. The materials science company currently distributes a roof coating that features its novel heat-control technology across the company. Originally founded in a garage, the company has now moved from its 10,000-square-foot space at Halliburton Labs into the larger location to support its growth.

“The new facility allows us to not just focus on the roofing, and that’s growing at a pretty rapid pace, but also stand up different production lines for our next iteration of technologies coming-out," Mike Francis, co-founder and CEO of NanoTech tells InnovationMap.

The space allows for a 340 percent increase in the manufacturing and operational capabilities, including producing 55 million square feet a year of roof coating. Francis says the new products he's focused on launching and scaling include a wildfire protectant coating and liquid applied insulation for trucks and containers to control heat for driver and worker safety.

Francis adds that he will be expanding the company's team to support this growth.

“We’re constantly hiring now,” he says. “We have about 25 employees right now. Next year, we’ll probably be double that. We’re kind of in a hypergrowth phase."

Francis likes to credit Houston in part for NanoTech's ability to grow at this pace and to be successful.

Mike Francis is the CEO and co-founder of NanoTech Materials. Photo via LinkedIn

“Houston has a shot at being one of the top startup cities of the world — I think it’s going to take a lot of time and capital, but what makes Houston different is its ability to scale existing technologies,” Francis says.

“I really think that Houston is already the spot to take an existing technology and build a team around it to turn it into a company because you have all of the players — whether it’s the end customer or the incubators and 'scalerators' — and you have all of these pieces coming into place," he continues. "Maybe it’s not the best place to start a company, but it’s definitely the best place to scale a company because of the ecosystem is really willing to participate and raise up startups like ours."

As the first company selected for Halliburton's incubator, Halliburton Labs, when it launched in 2020, NanoTech has worked closely with the company that housed and supported them for years.

“Once you’re in the Halliburton Labs fold, they are always just a phone call away from making something happen," he says. “We’re transferring all that knowledge into a bigger facility — growing up and graduating from what they gave us.”

Last year, NanoTech raised an oversubscribed funding round that brought on a handful of new investors. The details of the round were not disclosed, but NanoTech did release that the round included participation from three institutional investors, two corporate-strategic investors, and seven family offices. The company originally raised its seed round in 2020.

The NanoTech team, including Francis and Carrie Horazeck, chief commercial officer, joined the Houston Innovators Podcast last year to discuss how they've rolled out their first line of business.

Texas lands in top 10 most-expensive cities for running a new business

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Everything is bigger in Texas — or at least somewhat bigger — and that appears to include the cost of running a new business.

A new ranking from business consulting firm Venture Smarterputs Texas at No. 9 among the states with the highest expenses for starting and operating a business.

New York appears at No. 1 on the list, followed by Washington and Massachusetts.

The cheapest state? Mississippi. It was preceded in the ranking by Kentucky and North Dakota.

To come up with its list, Venture Smarter looked at eight metrics, including corporate tax rate, average LLC filing fees, average real estate costs, and minimum wage.

Texas scored 59.74 out of 100 for startup expenses, with a higher score being worse.

The Lone Star State tied with Tennessee for the highest initial LLC filing fees ($300). But unlike many other states, Texas doesn’t require business owners to pay LLC filing fees each year to keep a business incorporated.

Texas fared well on several counts, though, such as no corporate tax, a low state-mandated minimum wage ($7.25 an hour), and relatively low real estate costs.

“This research aims to provide valuable insights into the business climate across various states, offering new entrepreneurs the information they need to make well-informed decisions on their entrepreneurial journey,” Venture Smarter says in a statement. “By understanding the unique characteristics and challenges of each state, aspiring business owners can navigate the complexities of different markets and optimize their chances of success.”

How to evaluate an IPO, according to Houston researchers

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Many investors assume they can judge the strength of an IPO based on the reputation of the underwriter supporting it.

However, a recent study by Rice Business professors Anthea Zhang and Haiyang Li, along with Jin Chen (Nottingham University) and Jing Jin (University of International Business and Economics), proves this is only sometimes true — depending on how mature the stock exchange is.

Getting your company listed on the stock market is a big step. It opens new opportunities to raise money and grow the business. But it also means facing increased regulations, reporting requirements and public scrutiny.

To successfully launch an initial public offering (IPO), most companies hire “underwriters” — financial services firms — to guide them through the complex process. Because underwriters have expertise in valuations, filing paperwork and promoting to investors, they play a crucial role in ushering companies onto the market.

In well-established markets like the New York Stock Exchange (NYSE), an underwriter’s reputation carries immense weight with investors. Top-tier banks like Goldman Sachs have built their reputations by rigorously vetting and partnering with only the most promising companies. When Goldman Sachs takes on the role of underwriter, it sends a strong signal to potential investors that the IPO has met stringent standards. After all, a firm of Goldman’s caliber would not risk tarnishing its hard-earned reputation by associating with subpar companies.

Conversely, IPO firms recognize the value of having a prestigious underwriter. Such an association lends credibility and prestige, enhancing the company’s appeal. In a mature market environment, the underwriter’s reputation correlates to the IPO’s potential, benefiting both the investors who seek opportunities and the companies wanting to make a strong public debut.

However, assumptions about an underwriter’s reputation only hold true if the stock exchange is mature. In emerging or less developed markets, the reputation of an underwriter has no bearing on the quality or potential of the IPO it pairs with.

In an emerging market, the study finds, investors should pay attention to how much the underwriter charges a given IPO for their services. The higher the fee, the riskier it would be to invest in the IPO firm.

To arrive at their findings, the researchers leveraged a unique opportunity in China’s ChiNext Exchange. When ChiNext opened in 2009, regulations were low. Banks faced little consequence for underwriting a substandard IPO. Numerous IPOs on ChiNext were discovered to have engaged in accounting malpractice and inaccurate reporting, resulting in financial losses for investors and eroding confidence in the capital markets. So, for 18 months during 2012-2013, ChiNext closed. When it reopened, exchange reforms were stricter. And suddenly, underwriter reputation became a more reliable marker of IPO quality.

“Our research shows how priorities evolve as markets mature,” Zhang says. “In a new or developing exchange without established regulations, underwriter fees paid by IPO firms dictate the underwriter-company partnership. But as markets reform and mature, reputation and quality become the driving factors.”

The study makes a critical intervention in the understanding of market mechanisms. The findings matter for companies, investors and regulators across societies, highlighting how incentives shift, markets evolve and economic systems work.

The research opens the door to other areas of inquiry. For example, future studies could track relationships between underwriters and companies to reveal the long-term impacts of reputation, fees and rule changes. Research along these lines could help identify best practices benefiting all market participants.

“In the future, researchers could explore how cultural norms, regulations and investor behaviors influence IPO success,” says Li. “Long-term studies on specific underwriter-firm pairs could reveal insights into investor confidence and market stability. Understanding these dynamics can benefit companies, investors and policymakers alike.”