Divorces are hard. Divorces withbusinesses are harder. Valuing a business that is owned by you and/or your spouse can be just as hard. In this series of blog posts from the attorneys with the Law Office of Bryan Fagan, we would like to share some information for any person in our community that is considering a divorce or finds themselves being forced to consider a divorce as their spouse has recently filed a divorce petition.
It is always smart to consult with and hire an attorney in conjunction with a divorce but we hope this information will provide you with background knowledge to utilize once your divorce begins.
An appraiser will need to discount the value of the business by the percentage that a spouse owns
Suppose that in your divorce case an appraiser is hired (usually, someone whose job title is as a forensic accountant) and that appraiser determines your business is worth one million dollars. You also own a 40% share in the business.
Because you are what is known as a minority shareholder the value of your business would have to be reduced. The reason for this is because your interest is not marketable as the business as a whole would be. If your ownership percentage is measured in shares of stock you cannot just go out into the marketplace and sell privately held shares of stock in a relatively small company.
On the other hand, suppose that you own 75% of a company as a shareholder. This changes the equation dramatically. The reason is that in Texas a minority shareholder in a company does not possess many rights. As someone that owns 75% of the shares in a company you own a controlling interest in the company and the value of your business would not be reduced by a percentage in that situation.
Often times the owning of a minority interest reduces your share of the overall business by a certain percentage for marketability purposes as well as the hit the value takes over your only owning a minority share of the stock in the company.
Buy-sell agreements explained
If you are one of a handful of owners in a small business then it is likely that each shareholder, including yourself, has signed an agreement that states if you pass away, quit the business, is fired or gets a divorce then your company would buy back your interest in the company at a price set forth in the agreement. This is known as a buy-sell agreement.
These type of agreements can have an impact on the value assigned to your interest in the business. Two important questions should be asked if you find yourself in this position:
- is your business a partnership or a corporation?
- does the agreement that you signed address the valuation question in the event that you get a divorce or only in the event of your death or other events that leads to your leaving the firm?
To illustrate these questions let draw up a hypothetical scenario. Suppose that you are a doctor who owns one-quarter of a medical practice. You have signed a stock purchase agreement that sold you 20,000 shares of stock at one dollar each.
In the purchase agreement, you and your wife are required to sign a shareholders agreement that states in the event of a divorce you would have to sell your stock back to the other partners in the medical practice at the same price per share of stock.
What happens if you and your wife do not sign the shareholder's agreement? How is a court likely to rule? Are you bound by the agreement that the other partners signed? It is the recent history of courts in Texas that the stock purchase agreement made the shareholder's agreement valid against your wife in a divorce.
Your shares of stock would have been worth $20,000- the price of the stock in the shareholder's agreement- not whatever the current value would be. It would not be the book value of the stock (assets minus liabilities) or fair market value of the stock (what a willing buyer and willing seller with equal information in the market-place would agree the stock was worth).
Is there a non compete clause in place for the spouse who owns the business?
The court that your divorce case has been assigned to must assume that if you own all or part of a business and are leaving that business you are also taking your professional reputation with you.
For this reason, whatever personal goodwill is stored up within your person in your community there cannot be any value added to your business. Your presence is temporary within the business, as your divorce only proves. If your business is ordered to be sold in the divorce then a buyer is not interested in the business as much as she would be if you (along with your sterling professional reputation) were still involved in the business.
What can a buyer of that business assume to be the case as to whether or not you can immediately open up a competing business in that same space that your prior business was involved in?
Obviously, if you are allowed to start up your own firm (along with your aforementioned sterling reputation and goodwill) you will act as another competitor to your old business, theoretically driving down the value of your old business. How can the appraiser accurately account for this question and value your business as accurately as possible?
The key to understanding this question is to know whether or not a non compete agreement has been signed. A potential buyer would need to know this prior to making an offer to purchase your agreement.
An up and coming businesswoman would likely not be as interested in paying top dollar for your business if she knew that the venerable and trusted businessman who started your business (namely, you) would be immediately able to hang a shingle across the street from your old business to start your own enterprise.
In a divorce where there is no non compete clause between you and your business, it should be assumed that if you eventually are to sell your ownership interest in the business that you can compete with your business that has been sold. How much this should reduce the value of your old business depends in large part on how much of your personal goodwill has gone into the overall value of the company.
On the other hand, if there is a non compete clause in place the appraiser of your business during your divorce should take that into consideration, likely causing an increase in the value of the company as a result of that non compete clause.
If you are wondering whether or not a judge can issue an order in your divorce for you or your spouse to not compete against your old business for a period of time, the answer is that a judge cannot do so. Seeing as how you cannot ask a court to issue a non compete against your spouse in this situation, you cannot assume that your spouse would not compete if she sells her interest in the business.
Valuing a business- tomorrow’s blog topic
Now that we have been able to discuss in detail some of the ins and outs that go into valuing a business, I would like to shift gears in our next blog and discuss the different methods for valuing a business. Selecting an appropriate appraiser of your business is up to your attorney but your input is important.
Please consider contacting the Law Office of Bryan Fagan if you have any questions about this subject or any other in family law. A consultation with our office is free of charge and are available six days per week.
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Other Articles you may be interested in:
- Methods for Valuing a Business in a Texas divorce
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- What happens to your business in a Texas Divorce?
- How to handle a high net-worth divorce in Texas
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Law Office of Bryan Fagan | Business Owner Divorce Lawyer
The Law Office of Bryan Fagan routinely handles matters that affect children and families. If you have questions regarding Business Owner Divorce Lawyer, it's important to speak with a Business Owner Divorce right away to protect your rights.
A Business Owner Divorce Lawyer is skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact Law Office of Bryan Fagan by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan handles Divorce cases in Spring, Texas, Cypress, Spring, Klein, Humble, Kingwood, Tomball, The Woodlands, Houston, the FM 1960 area, or surrounding areas, including Harris County, Montgomery County, Liberty County, Chambers County, Galveston County, Brazoria County, Fort Bend County and Waller County.