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Protecting Your Business Amidst A Messy Divorce

Handling assets is never an easy part of the divorce process in Texas, but property division is even more complicated when you or your spouse own a business. The basic legal concepts apply in the same way they do with other assets, in which items are identified as community property and split between the parties. However, the issue isn’t so clear-cut with a business as compared to a house or car, especially when your divorce is particularly contentious. Unless you’ve executed a pre-marital agreement or addressed the matter in a shareholder’s agreement, your business and associated investment could be at risk. 

You might be relieved to know that there are strategies to protect your interests, though it’s wise to rely on a Texas business owners’ divorce attorney for the details. It’s also helpful to review a few facts you need to know about protecting your business in a messy divorce.

 Multiple factors determine whether a business is community or separate property. The default rule is that only assets acquired during the marriage are community property, and everything else is separate. However, when the lines are blurred as they are with interests in a business, the determination of community versus separate property depends upon: 

  • The date of marriage compared to the date the company was founded;
  • The source of funds used to start the business, either joint or separate;
  • What each spouse contributed to the business during the marriage, financially and through sweat equity; and,
  • Other relevant factors.

There are three options for handling a business in a divorce. When the proceedings are bitter and hostile, the first alternative will probably be off the table. Co-ownership and operation of the organization likely won’t be possible between ex-spouses who endured a messy divorce process. Still, you might consider the others: 

  • You could sell the business off to a third party, at which point you would split the proceeds. This is obviously not a suitable alternative if you want to keep the company, and it may also not work if there are other stakeholders who disagree with selling.
  • You might buy out your spouse’s interest, keeping in mind that there are ways to work out an arrangement other than paying in cash. You could apply the value of what you’d be entitled to receive for your half of the home, vehicles, and other community property. 

Valuation of the business is necessary. Regardless of which option is right for your situation, you will need to assess the value of the company as part of the divorce process. There are three methodologies for establishing business value:

  1. Market Approach: With this method, you’ll compare your business to one that recently sold and is similar in terms of size, industry, and geographic region.
  2. Income Approach: Through this valuation method, you start by evaluating one factor of your business and converting it into the economic benefits it provides over time. For instance, you can place a dollar value on profits by reviewing past and current profit reports.
  3. Asset Approach: This method assesses your business assets and liabilities to establish the value of the company. Note that intangible assets are included in the calculation, such as intellectual property, customer lists, trade secrets, and many others.

Don’t forget about the value of goodwill. Included in intangible assets is what goodwill contributes to the company’s value, so this assessment must be part of your calculations. Texas courts have found that there are two types for purposes of divorce proceedings. Personal goodwill is associated with the individual who operates or is the “face” of the business. The company would never be the same without that person participating in running it. Enterprise goodwill is connected to the company itself, such as through branding and reputation. Executives and employees may come and go, but the goodwill remains intact. Both personal and enterprise goodwill should be considered as part of a business valuation during the divorce process.

Trust A Texas Business Owners’ Divorce Lawyer To Protect Your Interests

If you’re embroiled in a particularly acrimonious divorce and your business is one of the key assets, it’s essential to work with skilled legal counsel who has specific experience in this area. Our team at The Ramos Law Group, PLLC has in-depth knowledge of the laws that apply to business interests, so we can develop a strategy to obtain the best possible outcome in alignment with your objectives.  

Please contact our office today to set up a consultation, where we can review your circumstances and determine a plan to move forward with your business.