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As a business owner, your daily responsibilities already demand significant time and attention, and preparing for a divorce is rarely top of mind. However, when Texas divorce and business ownership intersect, thoughtful preparation becomes essential. Balancing the needs of your business with the realities of divorce requires a strategic approach that considers both your professional and personal interests. The attorneys at the Law Office of Bryan Fagan understand these dual challenges and are here to help. In this blog post, we focus on how to prepare for a divorce in Texas by viewing your case through the lens of both your business and your family—because protecting one without considering the other can put both at risk.
If you have questions about this blog post, then you can address those questions to the attorneys with the Law Office of Bryan Fagan. Our licensed family law attorneys offer consultations free of charge six days a week. When you meet with one of our attorneys, you can discover information that is practical and usable for your case.
Goodwill as a divisible asset in a divorce
There are physical parts of your business- sales orders, assets, property, and inventory that have a tangible dollar value associated with the business. However, there is also an intangible asset known as Goodwill that is associated with your business. There are two types of goodwill associated with a business. The first is personal goodwill. This is goodwill associated with your name and the business. In other words, if someone utilizes your business for a good or service because of your name and reputation, then this is personal goodwill.
Business goodwill is the idea that people frequent your business because of its reputation in the community. Does “Clean Spaces Lawn Service” have a tremendous reputation in the community? If so, then this is an asset that matters to your business. Word of mouth spreads, and then your business can take off. Generally, business goodwill is community property and thus divisible in the divorce. On the other hand, personal goodwill is a separate property.
What type of business do you own?
There are different types of businesses that a person can own. The first is a business like a law firm, medical practice, or consultancy. Other types of businesses are retail, like boutiques, restaurants, and online companies that sell goods or services. Depending upon the type of business that you own, there are different things that you should bear in mind. In other words, your focus in the case will be different if you own an accounting firm versus if you own an ice cream parlor.
What can happen to your business in a divorce?
Much like the decision of what to do with your home in a divorce, there are a few options to select from when you are deciding what to do with your business. Depending on what you want to see happen, you can make decisions accordingly. Many families in your position will work these issues out in advance so that you can be better prepared for the divorce itself. Working with a team of advisors and people that you trust can help you arrive at a decision that is in your best interests and that of your family.
The tried-and-true option number one when it comes to handling matters associated with your small business is to buy your spouse out in a divorce scenario. First, this is an option that typically works well when your spouse has little or no involvement in the business. He or she may have been married to you during the beginning of the business, but has no formal role as an employee or advisor. As a result, your spouse may simply be looking to be paid a fair, community property portion of the company’s value.
Here is where your particular financial situation matters. Paying your spouse money after the divorce likely means doing so in cash. When you have cash to pay your spouse their share of the business, it should be done with a plan in mind. If you have sufficient cash on hand, then that may be the best option for you to choose. It allows you to walk away from the transaction without any strings attached.
Different thoughts on how to structure a small business payout
On the other hand, you may need to negotiate a payout over a certain period. For example, if your spouse’s share of your business is $500,000, but you don’t have that kind of cash available, you may look to create a plan with her for the payment of that sum of money over time. Coming up with a sensible payment plan that suits your needs is something that the Law Office of Bryan Fagan can help you with.
What can you “trade” your spouse instead of cash?
On the other hand, if buying your spouse out of their share of the business makes sense, but you do not have the cash, there may be other assets that you can utilize. When you start to consider your options in an area like this, you must consult with your attorney and a team of trusted advisors. That way, you can gain a wider base of knowledge when it comes to your life and what may suit you best.
Equity in the home may be equal to or even greater than their share of the business. If you want the business more than you want any portion of the house, you may choose to negotiate for your spouse to keep the house, and you keep the business. This would be a clean method of property division. Other choices that may be available to you include signing over retirement assets or other investments. Consider taxes, your age(s), and other factors when determining which option makes sense for your family.
Selling a small business and moving on from it
Another option you may choose when it comes to handling the business in a divorce is to sell it. Many times, you may not be interested in operating the business any longer. Economic conditions may have changed, or the business may no longer be profitable. There are three D’s associated with business ownership that strike me as important here. Those are death, disinterest, and divorce. Any of these three may become a good reason to stop operating a business. Disinterest and divorce may both be relevant in your situation.
You may have been looking at closing for the business for the past few months or longer. The divorce provides you with an opportunity to assess whether you want to even continue operating the business at all. In fact, why not use this as an opportunity to assess your financial situation to determine what your goals are moving forward? It may be that you are focused on other challenges now that the divorce is quickly approaching. Do not use the divorce as an excuse to close the business, if that is not your desire, however.
Selling a business is not like selling a car or even a house. There are a lot of considerations to think about when it comes to selling a business. Working with a professional who serves in the area of buying and selling businesses is a wise decision. Think of these people as realtors for businesses. Consult with people in your field or begin to perform research to determine who may be suited to help you in this situation.
Why should you hesitate to sell your business during or after the divorce?
There are potential downsides to selling a business that need to be considered here. As we just mentioned, if you think selling a house can take time, then selling a business may not be for you. It can take a great deal of time and money to sell a business. There are relatively few buyers out there for your type of business. This is true even if you have a business that is successful and appeals to a wide range of people. Consider your options as you think more about what you want to do with the business.
A consequence of it taking a long time to sell the business means prolonging the divorce. There are two ways to approach this topic. The first is to delay the divorce indefinitely until the business can be sold. This may not please the court that your case is assigned to. Odds are the judge will only delay or extend the period for your case for so long. After that, he will expect that you and your spouse proceed with the divorce.
Even though the sale of a business may start a new beginning for you that carries with it challenges. Starting from scratch means finding a new business model, clientele, employees, and a place to run the business. All of this while you are trying to rebuild your life after a divorce. Before you decide to sell your business, consider these challenges first as you take on those associated with selling your business.
Operating the business together with your ex-spouse
Perhaps the most challenging option to select would be to operate the small business together with your ex-spouse. It is normal to want distance from your spouse. Some of you who do not have children with your spouse can achieve this result, post-divorce. Others of you will need to be able to co-parent and manage a relationship with your former spouse. Operating a business with your spouse means taking on a range of challenges in the immediate aftermath of the divorce.
Consider your relationship with your spouse. Do you two have any challenges when it comes to communication? You likely do, or else you two would not be going through a divorce. Would you be able to set aside those differences and focus your energies on running a business together? From where I sit, I would find this to be incredibly awkward and difficult. However, the success of the business may override any concerns about the awkward nature of the business relationship.
On the other hand, both of you may have a good relationship with the other person. Not everyone going through a divorce can stand the sight of the other person. In a situation like this, continuing in the business may make a lot of sense. Especially if the business is successful. This is the type of situation where listening to your trusted group of advisors makes a great deal of sense. Gain some insight from their viewpoints and then negotiate with your spouse on this subject.
How to approach the division of divorce- assessing the value of your business
An important part of dividing a business in your divorce is determining the value of the business. In other words, you are appraising the business. You may be familiar with the appraisement of a home if you are trying to buy or sell a property. Home appraisers take comparable properties from your area and then perform a basic analysis of your home and its environment. From there, an appraisement is completed.
What is challenging about appraising a small business is that there are many more factors to consider than appraising a home. For better or worse, the home you live in is static. It does not change from moment to moment. The condition of the home itself is what it is. The same could be said for your area in the neighborhood in which you live. These are factors that will not likely change much over the next few months.
The same cannot be said for your small business. Market trends change from time to time. Additionally, there are fewer businesses and operations than there are houses in your area. As a result, finding comparable small businesses to compare yours to may be a challenge. For this reason, working with an experienced family law attorney matters. The attorneys with the Law Office of Bryan Fagan have served business owners and divorce many times. We know of competent and cost-effective business appraisers in this area.
What are the most popular methods to appraise a small business?
We have already discussed the most common method of appraising a small business. It is known as the market Method of appraisal. Namely, a business appraiser would compare your business to similar businesses in your area. From there, the value of the business can be ascertained. Bear in mind that this method may not be effective if there are no businesses of your type in the area where you live. Niche Businesses that serve a limited clientele may be less likely for a market approach to work well.
Next, you can utilize the past performance of the business as far as income is concerned to determine its value. This will require you to open the books of your business and determine the profits and income generated by the company. This method leans heavily on the past to determine the future as far as earnings are concerned. From there, the general value of the business can be determined. The longer your business has been in operation, the more accurate the value can be gained. Businesses that have been operating for a relatively short period may have greater difficulty when it comes to this method.
Finally, determining the value of your business based on its assets, there is one other method that can be used. Accounts receivable, inventory, and future sales prospects can be weighed against liabilities like debt. Again, talk to an experienced business sales broker before choosing a specific method to employ in your divorce.
Final thoughts on divorce for the small business owner
As a small business owner, you understand what it means to take calculated risks—many of which are essential for getting a business off the ground and keeping it successful. Building something from the ground up requires confidence, resilience, and stamina. However, navigating Texas divorce and business ownership at the same time introduces an entirely new level of complexity. Managing the demands of your business while facing the legal and financial challenges of divorce requires careful planning and a thoughtful strategy to protect what you’ve worked so hard to build.
For that reason, it is recommended that you work with an experienced family law attorney to help guide you throughout your case. From there, you can develop a strategy geared towards serving yourself and your family to the best of your ability. The small business represents a great deal of time and effort put in by you and those around you. The last thing you want to do is not care for this business to the best of your ability. Finding a family law attorney whom you trust is the first step towards establishing a plan that can be utilized successfully in your divorce.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
The attorneys with the Law Office of Bryan Fagan offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law. Before signing a document or negotiating on a subject you do not know well, contact our office. We look forward to the opportunity of serving you during an important part of your life. The Law Office of Bryan Fagan is on your side.
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