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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 the success of your firm 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. You need to be able to strike a balance between the two in order to have a truly successful business venture. 

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

On the other hand, there are many aspects to a divorce that are extremely emotional. Understandably so- this is your marriage and your family life that we are talking about, after all. You absolutely should be emotional about the breakup of your marriage 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, then I recommend that you check 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 important 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 then, beside 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 incredibly rewarding 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 a business 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 that needs to be had from the very beginning. The separate property of either you or your spouse will not be divided in a Texas divorce. 

However, this would be an awfully short blog post if the hypothetical business we are discussing 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 business 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 at which 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 very difficult to value. Personal property, vehicles and homes are much easier to value 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 business 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 hard 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?

This is the question that you need to ponder when determining what kind of discussion will be necessary in regard to 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 business was created after you were married, then it is likely to be considered to be community property. Community property will theoretically be split fairly 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 important step in your case. If there is a question as to whether or not the business 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 both 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 business. 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 strongly this evidence when dividing up the business in a trial situation. Keep in mind that even a business started before your marriage may have a community interest within it- especially if income from the marriage was used to build the business into being the profitable enterprise that it is today.

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

An asset approach to determining the value of your business means that, rather than comparing your business to similar businesses 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 of time will be utilized the build the value of your business. The income will be used to project what the business 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 business based on the income approach. 

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

Overall, it is recommended for both you and your spouse to hire your own valuation experts to determine a value for your business and be prepared to testify in a trial were it to come 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 a value of the business for the purposes of 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 right for your case in this regard. First, choose an expert who has done this type of valuation for a 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 be able to defend their valuation in language that is clear and concise. Ultimately, the expert should be equipped to go into court and describe their methods used for valuing your business to a judge. Being able to use 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. 

You should also inquire about how many other clients your potential expert has. Ideally, you should be able to 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 of people who can help with getting 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 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 in order 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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