Being a small business owner may often put you in a position where you are exhilarated and terrified all in the same day. While I have never owned a small business myself, I can tell you from having worked with small business owners before that the prospect of making a living for yourself by selling a product or selling yourself as a service can be both exciting and intimidating. You are used to putting yourself out there and making yourself vulnerable to the impressions of the marketplace. Every day is a learning opportunity, or you can test what you know and test what you think you know against the desires of the people in your community.
Whether you are successful in business depends on a lot of factors beyond the service or good that you provide. For example, we all know that you may be the best chef in the world and have some business sense to back it up, but if you decided to open up your restaurant at the beginning of the coronavirus pandemic there was basically no way that you were going to survive the first month of the lockdown due to people not being able or not being willing to eat out. That's not necessarily a reflection of your business acumen or your cooking skills. It is much more of a reflection of circumstances that go beyond your control.
I think it is fair to draw some parallels between these type of circumstances and a divorce. While so much of the information that we share in this blog is geared towards helping you prepare for a divorce, the fact is that there is only so much preparation you can do in the face of external circumstances that you have no control over. There is an old saying in business that goes something like: business is easy- until people get involved. The same can be said for divorce. If all that mattered in a divorce was your ability to file some paperwork, wait for the deadline to pass and then file some more paperwork then getting a divorce will be pretty simple. That, however, is not how divorce works.
one advantage that I think business owners have over nonbusiness owners, in the context of a divorce, is that you are already used to viewing circumstances based on their component pieces and then making objective decisions about them. My general inkling is that for some people divorce can be an overly emotional process where those folks will have trouble identifying the best decision to make at a particular time because their emotions get in the way of their decision-making abilities. If you have trouble with your emotions and regulating them, then you may have trouble in a divorce.
Small business owners also have an advantage because you are used to dealing with successes and failures. Some ideas that you have in business will work well and others won't. That doesn't mean that you will stop coming up with ideas or stop trying to implement them in the daily life of your business. Your business thrives or fails based on many different circumstances, hopefully mostly having to do with circumstances related to you. If you own a small business, then I think you are in an interesting position If you are considering a divorce from your spouse.
Keep in mind that, as a small business owner, your hard work and effort in building up your business will be at stake in this divorce. Texas is a community property state. This means that property, assets and even your small business may be divided in one way or another in your divorce. It does not matter if your spouse never set foot in your business even for one day during your marriage. It does not matter if your spouse has no business knowledge nor any desire to do anything but spend the money you make from your business. All that matters is that your business was started during the course of your marriage. If that is the case then there is an argument to be made that the assets of your business, the earnings of your business and the value of your business in a sale situation or all at stake in the divorce.
With that said, it is of the utmost importance that you have a plan on how to prepare for your divorce as a small business owner. You may have well-meaning friends and family members who are giving you advice on how to get ready for divorce. The difference between a typical divorce in a business owners divorce can be quite significant. As a result, you should pay close attention to any specific advice that you can receive regarding the elements of a business owners divorce and then make plans on how to prepare for them given your circumstances.
Figure out how to value your small business
As I mentioned a moment ago, a divorce tends to bring out the emotion in both parties. The emotion in many divorce cases comes from children, in other divorce cases it comes from the business and of the divorce transaction. If you or your spouse begin to feel overly stressed out about your divorce it can impact the end result of your case. Whereas, you in your levelheaded state may have made different decisions in the divorce, the stresses of your divorce may lead you to making decisions that are not in your or your business’ best interests.
a major hurdle that divorcing spouses need to get over when it comes to a small business is how to attach a value to that business. There are numerous different methods for valuing a business such as one that includes the assets of the business, the name recognition of the business owner or of the business itself in the community and a handful of others. I do not mean to get into the specifics of business valuation in this blog post, but we have written on this subject before.
What I am trying to impress upon you today is that you and your spouse need to agree on a business or person who can value your business correctly and accurately. work with your attorney and rely on their experience when naming a person to submit an evaluation for your business. In an ideal world, you and your spouse should agree on the person who is valuing your business. If you are unable to agree then you can compare the two persons that you choose and then figure out how to split the difference between their valuation differences. Either way, a professional needs to be involved when valuing your business for the divorce.
Keep the business and lose other property
now is the time that you will really come to understand how much you care about your business and how much you want to keep the business and its operations out of the control of your spouse. Protecting your business in the divorce may be your number one goal, especially if you do not have any children. Depending on your circumstances it may benefit you does simply make a trade offer within the divorce and in the community property division. For example, if your spouse’s share of your small business is valued at $150,000 then you may simply want to make a trade offer wherein, she can keep $150,000 of your share of a community estate in exchange for you keeping 100% control of your small business
obviously, this plan would only work if you have enough community property to spare when assigning property rights at the conclusion of your divorce. Otherwise, you may be interested in taking out a loan or structuring some other finance type deal where your spouse can receive an equal amount of value to that of her portion of the small business. It is worth considering all of your options in going in the direction that you are most comfortable.
Another way to look at all of this is that once a value to your business is agreed to then you can simply pay him or her cash in order to keep control of your business. As I mentioned a moment ago, however, you need to be able to have the cash on hand to be able to make this plan a reality. If you do not have the cash on hand, you may consider taking out a loan or finding an investor who could front the money for your spouse. Neither of these options may work for you if you are someone who is averse to taking out debt.
If you are a person who is not in a position to take out a loan to buy out your spouse’s share of the small business then I have an idea that may be of interest to you. It is a little more complicated but what you could do is create an agreement with your spouse where she would receive a certain percentage of the profits of your business over an extended period of time that would cover the valuation of the business. This way you would not have to take out a loan and your spouse would be able to recoup the value of the business overtime. If your spouse is willing to enter into this kind of agreement with you it could save you a lot of hassle and a lot of debt in the long run.
Put yourself in a position where you can argue that the business is not a part of the community estate
this is probably going to be the hardest piece of advice I provide to put into action. Most of the time, the money that you used to build a small business comes from your income from another job. This income is almost certainly community income and therefore part of your community estate. It would follow that the small business created with that income would then be part of the community estate as well. Keep in mind that all this is going on while you are married. On the surface, it would seem that your spouse has all of her bases covered to argue that the small business and its value are community property.
However, if you are able to plan ahead you may be able to build your small business up out of assets and income that are not part of the community estate. In order to do this, you would need to be able to have enough money from your separate property in order to build the business without dipping into the funds from your community estate. Once you use money from your joint bank accounts or family bank accounts to build the business you weaken the argument that a large portion of the small business belongs separately to you. Keeping track of the money used to finance your business Is a wise step to take. You may have everything lined up in order to prove your business is separately owned but if you do not have the paper trail to back up your positions then you may have a hard time in court making your case. Emails, bank account transfer forms, loan agreements and letters from financial institutions are all the kind of paper that I am talking about that may prove invaluable to you if you find yourself arguing in court that your small business is at least partially your separate property.
Questions about managing your divorce as a small business owner? 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 in person, over the phone and via video. We hope that you have gained a great deal of knowledge from today's blog post and look forward to the opportunity of meeting with you and your family to discuss whatever family law mattered is relevant in your lives.