Business Owner’s Guide to a Divorce

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Guide To Divorce In Texas

Today’s business owners are not the mom and pop type of yesterday. They must be business savvy, up on market trends and vigilant about their social media presence. A divorce can have a devastating effect on a thriving business if not handled correctly. A business owner contemplating a divorce in Texas should consider the following items before beginning the divorce process.

Community v. Separate Property

The first concern for any Texas business owner is to determine the characterization of any company. If the company was created or purchased prior to the date of marriage, or if it was inherited during the marriage, then it is considered separate property and is not subject to division during a Texas divorce. The spouse that owns that separate property must provide documentation evidencing that it was either inherited or created prior to the date of marriage, so a business owner will need to provide to their legal team documents evidencing the business’ date of inception.

If the company or business was created after the date of marriage, then it would be considered community property. This means that the entirety of the business (including assets, revolving contracts, bank accounts, equipment, etc) will need to be divided in the divorce.

There are circumstances where a business can be both community and separate property. For example, a person may have owned an interest in a business prior to marriage and after the marriage bought out a partner. This would result in a portion of the business clearly being one spouse’s separate property while the other ownership interest would be subject to a just and right division by the court.

Business Valuation

A major question for any business owner going through a Texas divorce is probably “what is my business worth?” If the company or business is part of the community estate, it is vital that an accurate

There are several methods of determining the value of a business entity. Any method or combination of methods may be used to calculate the value of a business entity. There is no required formula

  1. Fair Market Value – this is the value based on what a buyer would be willing to pay in cash to acquire the business.
  2. Book Value – this number is calculated by reviewing the finances and accounts of the business. This number is not always the most accurate as it only reviews a snapshot of the existing finances and does not account for growth.
  3. Comparative Market Analysis – this value is calculated in a similar manner to real estate comps. The business valuation expert will compare the business to similar types of businesses that have recently sold and estimate what the business in question will sell for.

As one can imagine, the above business valuation methods can have a range of different estimated values. This is why it is important to hire a knowledgeable business valuator who has experience in the market and type of business. If the value of the business is contested, both spouses may hire their own expert valuators and can present their dueling values at trial. The judge will then hear all the evidence and expert’s testimony and determine the value for purposes of property division.

Business Operation During the Divorce Process

A savvy business owner is going to want to make sure the day-to-day operations of the business entity are not negatively affected during the pendency of the divorce. Warring spouses can have a negative effect on the operations of a business, including mishandling of bank accounts and income, canceling accounts, harassing employees or other damaging actions. If the parties cannot mutually agree as to how the business runs and income is split during the divorce process, the court may need to issue some temporary orders. These can include injunctions prohibiting the harmful actions listed above, directions as to who handles the books and has access to the bank accounts. These agreements or orders from the court can keep the business running as usual until it is formally divided or awarded to one spouse.

Additional Concerns

There may be other specific business concerns that will need to be addressed. These can include:

  1. Are there additional owners to consider?
  2. Does the business have a buy-sell agreement in place that would prohibit a sale or awarding part of the business?
  3. How is the business structured? If an LLC, there could be procedural concerns with the articles of incorporation.
  4. Mixing business expenses with personal expenses. This could have an effect on the spouse’s income for child support calculation purposes.
  5. Is it a professional business such as a law firm or medical practice? Professionally-licensed businesses typically cannot be sold or awarded to an unlicensed spouse.

How a business entity is handled in a Texas divorce can be complicated and it is important for a business owner to make sure their divorce case is in the most capable hands. The Ramos Law Group, PLLC has handled a multitude of divorces involving business entities. The legal team has experience with business valuations, large corporations, small sole partnerships, and embittered spouses warring over the running of a business. Any Texas business owner contemplating a divorce should contact our firm to discuss strategy and long-term goals for the business.

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