How is a couple-owned business treated during divorce?

As a business owner, you know what it is like to balance a professional approach to your business activities with an emotional attachment to your firm’s success and how business is conducted in general. Not only do you want your business to turn a profit and be successful, but you also want to feel like you are being productive and contributing to the people in your community. It is not enough for you to only be focused on profit. It is also not enough to only have a heart for the emotional aspects of operating your business. It would be best to strike a balance between the two to have a genuinely successful business venture.

In this way, owning your own small business is much like a divorce. Many aspects of divorce require you to be highly rational, persistent, and results-oriented. Negotiating a division of your community estate, determining whether or not to sell your family home, and working through other complicated subject matter means that you must be prepared to confront problems with a level head. You may have heard other people observe that a divorce becomes a business transaction at a certain point. This is what that person would be referencing.

On the other hand, there are many aspects to a divorce that are incredibly emotional. Understandably, this is your marriage and your family life that we are talking about, after all. You absolutely should be passionate about the breakup of your wedding and the dividing up of your child’s time with you and your spouse. If you aren’t at least a little emotional about these subjects, I recommend checking your pulse. The key to achieving a successful result in your divorce, however you define success, is to blend the emotional and business components of your divorce and to consider each as distinctly crucial in their own right.

Business ownership in a Texas divorce

Texans certainly have the entrepreneurial spirit inside of us. If you own a small business besides your children, it is probably the pride and joy of your life. Being able to serve your customers/clients while providing a living for your family is, I imagine, an enriching experience. Owning that small business with your spouse can add another layer of reward to the whole process, but it can also add a layer of difficulty as far as determining what should occur in the event of a divorce.

Determining what is a fair outcome when it comes to dividing property up is truly in the eye of the beholder. Figuring out the value of your business is the first step of this process. There are multiple ways to value trade, and we will get into those a bit later. Whether or not the business is part of the community estate or one of your separate estates is the main discussion needed from the beginning. The particular property of either you or your spouse will not be divided in a Texas divorce.

However, this would be a concise blog post if the hypothetical business we discussed ended up as part of a separate estate. So, let’s assume that the small business is part of the community estate. At that point, either you and your spouse or the judge would be tasked with dividing the interaction between you and your spouse in some form or fashion. We typically see business valuation done in terms of the fair market value of your business. This is essentially the price your business would be exchanged between a willing buyer and a willing seller.

You will come to find out that there are many ways to value a small business. Not only will you and your spouse have to compare and contrast these various methods, but you will also need to consider that a small business can be tough to value. Personal property, vehicles, and homes are much easier to appreciate because those items are bought/sold in a free market (of sorts) with great regularity. Your Honda Accord’s value is pretty easy to figure out because it’s likely that 25 similar vehicles were bought/sold in the past few weeks here in the Houston area. Same for your house, and same for that baseball card you’ve been saving since you were a little kid.

Businesses are unique in this regard. You may own a company that is close to one of a kind. If that is the case, then there is probably very little data for determining what a business like yours has been sold for. Even if you have a more common business model and service a general area like southeast Texas, determining the value of your specific business can be challenging depending on a range of circumstances, such as the overall market for buying and selling businesses at the time of your divorce.

When did the business start?

You need to ponder this question when determining what kind of discussion will be necessary regarding your small business. When was it created? The next question you need to ask yourself is: what year did you and your spouse get married? If the company was created after you were married, it is likely to be considered community property. Community property will theoretically be split relatively evenly (once the value of the business can be determined) in the divorce, depending on the circumstances of your case.

Valuing a small business in a Texas divorce

Here is where some good old-fashioned arguing can come into play during the case. How you end up valuing your business will be an essential step in your case. If there is a question as to whether or not the company is community-owned or separately owned, then the source of the funds used to start the business may be relevant. Income from a jointly held bank account or money contributed by you and your spouse may tip the scales towards community property ownership.

A professional brought into the divorce to determine the nature of your business may also be interested in the degree to which both you and your spouse contributed work activity and sweat equity into the company. As in, if you never set foot in the business, but your spouse worked there every day since the start, then a judge may consider this evidence strongly when dividing up the company in a trial situation. Remember that even a business that started before your marriage may have a community interest within it- primarily if income from the wedding was used to build the company into the profitable enterprise it is today.

The market approach to valuing a small business in a divorce consists of comparing market studies of similar companies that have been sold in your area. Think of this like when you sell a home, and comparable home sales from your site are used when determining what price to list the house initially. For example, the person tasked with valuing the business (an accountant, for example) must have enough information on what similar companies have sold for in your area during that period.

An asset approach to determining the value of your business means that, rather than comparing your business to similar companies that have been sold in your area, the inventory, assets, and other tangible materials that make up your business when determining the value. In addition, the name recognition of your business, as well as your name recognition in the community, are taken into consideration, as well.

Finally, an income valuation approach may be utilized in your divorce. Whatever income has been created by your business over a certain period will be used to build your business’s value. The payment will be used to project what the company is expected to produce in the future as profit/income is concerned. The value of any real estate owned by the business will also be a factor in building the value of a company based on the income approach.

It is possible that your attorney and your spouse’s attorney could compare your business valuations and then just split the difference. Sometimes this simple method can be employed if your business is relatively small. However, it is usually the case that an expert in the field of valuing companies will be utilized to dig into the history of the business as far as its assets, debts, finances, and other relevant information.

Overall, it is recommended that both you and your spouse hire your valuation experts to determine a value for your business and be prepared to testify in a trial where it comes to that. A judge would weigh the circumstances of your case and determine the credibility and reliability of the testimony and figures presented by each expert when figuring out the value of the business for your divorce.

Selecting a valuation expert for your divorce

Choosing the right expert for valuing your business is very important. You and your attorney should ask questions about who is suitable for your case in this regard. First, choose an expert who has done this type of valuation for divorce previously. There is nothing wrong with a person getting their start in valuing businesses for a divorce, but don’t let yourself become that person’s first case. Pick an experienced party when it comes to selecting an expert witness. Ask how many divorces the person has worked on previously.

Next, the expert needs to defend their valuation in language that is clear and concise. Ultimately, the expert should be equipped to go into court and describe the methods used for valuing your business to a judge. Using easy-to-understand language while doing so in a logical fashion is the needle that you should be looking for in an expert. A family court judge has almost undoubtedly had experience in cases like yours but probably does not want to wade through a great deal of complex language to determine the business’s value. Experience testifying before a judge and withstanding cross-examination by an adverse party is essential in this regard.

It would help if you also inquired about how many other clients your potential expert has. Ideally, you should get updates from your expert at a moment’s notice if need be. If your valuation expert has a boatload of other clients, you may be pushed to the back of the line, depending on the time of year. If your expert has a staff who can help get information across, that would be a plus. Relying on the expert to take all your phone calls means that you will likely be left waiting at times.

Closing thoughts on valuing a business in a Texas divorce

A jointly held business can be a blessing to you and your spouse and can present a challenge to divide in a divorce. There are many factors at play when having this discussion in conjunction with a divorce case. Work with your attorney to organize financial documents early on in the divorce to save time later. Be willing to think creatively when dividing up your community estate as a whole, as well.

Questions about the material presented in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material presented in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week via phone, video, and in person. We appreciate your interest in our law office and look forward to speaking to you about how we can serve you and your family.

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