How will a divorce impact my business? If your marriage has come to an end, this question may be keeping you up at night. For business owners, a divorce can put the culmination of years or decades of work on the line.
The most appropriate course of action is not always clear and can be influenced by numerous factors. When was the business created? How large of a role does your spouse play in the organization? What is the business worth? Below, our blog outlines the questions of who gets the business in a divorce, how a business is valuated, and how you can work to protect your interests.
What is the character of my business
In Texas, only community property, also known as marital property, may be divided by the court based on what is just and right. Conversely, spouses are allowed to hold onto assets characterized as separate property. Separate property, within the context of the Texas Family Law, is defined as properties acquired before the date of marriage or properties acquired by gift or inheritance during the marriage. While legal statutes provide rules for the classification of assets, in practice, it is not always so simple. So, when is a business deemed to be community property?
If you owned your business before marriage, income generated by the separate property business during the course of the marriage is considered to be community property. Additionally, characterization of a business often becomes an issue during a divorce litigation. Accordingly, parties often rely on a financial experts such as forensic accountants or experts in business valuation to determine the character of a business. These financial experts (third party), can testify as to the character of a business and perform a tracing of assets. Businesses started after a marriage are considered to be community property unless it can be shown that the business was started using wholly separate funds. Again, tracing assets can be a vital part of this process.
What is the value of my business?
Another issue brought about during litigation is putting a value on a business. Determining the total value of a business is a complex task, often requiring the services of an expert. This person typically has an in-depth understanding of your business and industry. There are many aspects taken into account during the valuation of your business. Some of the consideration in valuing a business are its income, total assets (and debts), current market trends, services provided, and competitors.
The precise valuation of assets can be tricky as not all assets are tangible, such as the goodwill that your business has built. Goodwill is made up of the portion of a business’s value which extends beyond the worth of its total assets and income.In Texas, goodwill is divided into two categories:
- Personal goodwill is associated with an individual and is represented by the value added as a direct result of that person’s involvement with a company. Texas Supreme Court has ruled that personal goodwill attaches to a professional person because of confidence in the skill and ability of the individual cannot be divided. Accordingly, this is not included in the business valuation and is a separate property.
- Professional goodwill, sometimes called enterprise goodwill, is directly tied to the company and its reputation; for example, if a company derives leads or sales as a direct result of its community standing. In Texas, only professional goodwill may be considered community property and divided upon divorce.
Understanding how to valuate property can go beyond the numbers. It involves knowing what questions to ask and when to ask them. For example, if your ranch or farm is central to your business, what are your projected royalties from utility rights and are they likely to change in the future? Considering that the value of a business can fluctuate regularly, securing the services of a knowledgeable legal team can be a valuable investment. If you have questions about your specific situation, do not hesitate to get in touch with our firm.
Who Gets the Business in a Dispute?
There are three common options for the division and distribution of a company. The most suitable path can depend on if the business is jointly owned, the business’s value, and the ability (or lack thereof) of spouses to maintain a professional relationship.
Solutions for ownership can include:
- A buy out: For many business owners, their company is their livelihood and its loss can be unacceptable. In this scenario, one spouse may receive the business as a whole with his or her partner receiving comparable assets for their “share” of the company.
- Continued joint ownership: In cases where spouses can maintain a working relationship, joint ownership may be an option to consider. However, many divorcing spouses do not wish to maintain any sort of relationship with their ex-partner, and enduring hostilities can complicate business agreements.
- Liquidation: When no agreement can be reached, a judge may order the company to be dissolved and sold with proceedings being split accordingly between spouses. While this is usually not the first option explored, it is sometimes the only path forward.
Each method mentioned above comes with its own pros and cons, many of which will be dependent on a couple’s exact situation. For example, if a business is liquidated, it may take considerable time to find a buyer. However, before a business can be divided, it must be accurately valuated.
How Our Attorneys Can Help to Protect Your Interests
If you own a business, a divorce can represent a threat to your livelihood and the steps you should take are not always obvious. At Hendershot, Cannon & Hisey, P.C., we are here to help. Our comprehensive knowledge of business and family law uniquely positions us to assist with the division of complex property, unique assets, and business interests. From establishing a premarital agreement that would protect your business interests before entering into a marriage, tracing separate property during the classification of assets, to finding solutions for post-divorce business ownership, our legal team can be a guiding voice in your corner every step of the way.
Worried about how a divorce may impact your business? Call (713) 909-7323 and speak with our Houston business and family law attorneys today.
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