Divorce for Business Owners
A Texas divorce can be complicated on its own, but owning a business, whether it is a small, home-based business or a multi-million-dollar company, adds another level of complexity to any division of property. The Ramos Law Group, PLLC is well-versed in handling cases for business owners and other high-net-worth cases to maximize the amount of community property awarded to our clients.
Many of the clients who come to us for help with a divorce are business owners or executives in companies of all sizes, including in industries such as real estate, commercial construction, and oil. At the Ramos Law Group, PLLC, we listen to your needs, address your concerns relating to owning a business, identify points of contention and develop an exit strategy for your marriage while focusing on the goal of maximizing your division of assets.
Here are important details to consider in a Texas divorce with business equity on the line.
1. Is the Business Community or Separate Property?
Under Texas law, any property obtained during the marriage is considered community property unless proven otherwise. For example, if the business was founded before the marriage, then there is a good chance that all, most, or at least a portion is separate property. If the other spouse contributed to the business, then it could lead to a reimbursement claim even if found to be separate property. Consequently, if community assets were commingled with the business, it may affect the characterization of the business from separate to community property in contested divorce proceedings.
If a company or business was entirely formed after the date of marriage, then it would be considered a community asset and wholly subject to a just and right division by a Texas divorce court. It is essential to provide your attorney with proof of when the company was created or founded. Whether that is the first business checking account or articles of incorporation, those documents can be vital to determining the characterization of the business and how the ownership of the business is handled during the divorce.
2. How Will the Business be Divided?
The relevant factors for dividing business equity in Texas divorce include the value of the business, the other community assets to be divided, who owns/runs the business, and the community debts to be divided.
Most business owners prefer to compensate the other spouse for their share of the community assets rather than selling or dividing the business. This can be done by compensating the other spouse with a larger share of other marital assets: more equity in the home, more cash, post-divorce support payments (alimony) instead of large cash value. If this is the strategy for a business owner, it is vital to provide the legal team representing the business owner a full inventory of all assets and debts, so the legal team can best strategize a compensation plan.
Another option to resolve divorce with business equity involved would be to sell the business outright and split the proceeds between the parties. This often is the least desirable method, as parties who have spent considerable time and effort building up their business are often loathe to sell it. This method is often utilized when the parties absolutely cannot agree on a division, and there are not enough assets to adequately compensate a party for their community interest.
There is another often-underutilized option – dividing the company in an equal manner. If both divorcing spouses are business owners or play an integral role in the company and want to remain in their roles post-divorce, the parties could award the business in a 50/50 manner and both continue as joint owners. If the parties do not get along well enough to remain married to one another this option can be a potential minefield, but is an option to consider.
3. How is the Value of the Business Determined?
Business valuation in the state of Texas can be complicated, even outside the context of a divorce. There are several ways to determine the value of a business. The parties may stipulate the value of the business if both parties are on the same page as to the business’ estimated worth. This is the most simplistic way of determining the value, but is often overly simplified.
Valuation can be especially difficult for a small or closely held business. These businesses could have stock restrictions or prohibit ownership transfers, making valuation tricky.
One or both of the divorcing business owners may hire a forensic accountant and/or appraiser to provide an estimated value. This involves taking an inventory of all assets, liquid assets, stocks and shares (if applicable), inventory, revolving contracts, future contracts, loans, and outstanding debt, etc and determining what the actual value of the business may be. Competing parties may have competing business valuations, and if that is the case, then the Court must determine which expert valuation to use in the divorce context.
Methods for Asserting the Value of a Texas Business in Divorce
(1) Cost Approach: The Cost Approach involves analyzing the market value of a company’s assets. This typically gives the evaluator a “market floor” as many companies are worth more while in business than if they were to be liquidated.
(2) Market Approach: The Market Approach is similar to running comps in real estate. The business evaluator uses similar transactions for similar businesses to determine an estimated value. If a business is highly specialized and there are not similar businesses in the area this method may not be appropriate.
(3) Income Approach: The Income Approach is based on the theory that a company can be valued based on the amount of expected future income. There are two income-based methods, Capitalization of Cash Flow and Discounted Cash Flow. Capitalization of Cash Flow is most commonly used when a company has stable levels of growth, and that is expected to continue in the future. The Discounted Cash Flow is more flexible in that it allows for variations in debt repayment, growth rates, and other non-static concerns.
When divorcing as a business owner, it is critical to collaborate with a licensed family law attorney and business valuator who can advise you as to the best valuation strategy so one can get an accurate value of their business.
(4) What is Goodwill and What Impact Does it have on a Texas Divorce?
In addition to the tangible assets within the business, there is also the intangible asset of “goodwill.” There are two types of goodwill: personal/professional goodwill and enterprise goodwill.
Goodwill “value” is the total value of the business minus the total value of the tangible assets. This calculation results in determining how much more, if any, the business is worth than just its assets.
Personal/professional goodwill is the value that is directly tied to the business owner. If you are the face of a company or a long-standing owner, you have a specific skill and the entirety of the business depends on that skill, or you’re prominent in your field or community, then that value is your personal or professional goodwill. This goodwill cannot be directly attached to the value of the business entity or divided in a Texas divorce. Personal goodwill is considered separate property.
Enterprise goodwill is considered community property for business owners in a Texas divorce. This type of goodwill is integral to the business itself. This can include the location, the name (if it is a franchise), the acquired licensing, and the organizational structure. Typically, large businesses with a formalized structure have more considerable enterprise goodwill. If the company has capital investment, multiple owners, and does not depend on personal services, then it often has enterprise goodwill.
Often as a company increases in size and structure, there will be a natural transition from personal goodwill to enterprise goodwill. It is essential to discuss all aspects of your company with a qualified Texas divorce attorney so they can talk with you all facets of goodwill and what it may mean for your specific company.
5. How Will a Texas Business Operate During the Pendency of a Divorce?
A Texas divorce court will almost always make a ruling for the temporary operation of a community property business so that the business is not disrupted during a pending divorce. This may include temporary injunctions to prohibit a party from interfering with the business or it could be specific rulings as to which party may make certain decisions and how the business funds may be used.
A court will not divide or award the business until the divorce is finalized. This could be a few months, or it could be several years, so the court will likely determine at the beginning of the case some parameters for keeping the business up and running. Ideally, the parties would be able to reach a consensus on how the business should continue to operate during a divorce but absent an agreement the court will make a finding.
Are you a Business Owner? Need a Divorce? Call Today!
If you are divorcing with a business in the picture, it’s best to seek representation from a specialist in similar cases. Please contact the Ramos Law Group, PLLC.