What will happen to your business in your Texas divorce?

The main issues will likely be future business plans, characterization of business property and proper valuation.

When either or both spouses own business interests, property division in divorce becomes more complex. The business could be any of a number of types: a sole proprietorship, a family business, a professional practice, a self-employed entrepreneurship, a public or privately held corporation, a partnership, or others. The business could be completely owned or only partially owned.

The details of property (and debt) division are often decided through negotiation that results in a settlement agreement. If they do not settle, the judge in the divorce will consider each party’s evidence and decide how to divide the marital estate. A business owner or spouse of an owner would be well advised to seek the professional assistance of an experienced Board-Certified Family Law expert attorney in such a case.

Future goals and options

Each spouse must consider what he or she wants to happen with the business. Many issues are important, including the following:

• Is only one spouse involved with the business or do they run it together?
• Is it preferable to keep the business intact and running after the divorce?
• Should the business be sold and the proceeds divided?
• After divorce, will the parties still need income from the business?
• Are there third parties involved in ownership or management?
• Is the ownership interest in the business subject to a buy-sell agreement that requires that instead of being assigned to a spouse in divorce, it must first be offered to the other business owners for sale?
• Will the business continue under the ownership of one spouse who will buy out the interest of the other spouse, either as part of the divorce or by future payments?
• Was the business addressed in a pre-marital or post-marital agreement?

Characterization

Before any division is discussed, the business as an entity, and assets owned by the business must be property characterized as separate or community. Separate property is that which is brought into the marriage by a spouse, or inherited or received as a gift by only one of them.

Community property is everything else, including income and assets acquired during the marriage by either of them. Separate property normally stays with the original owner and is not subject to division, provided that its separate property character is not disputed or can be proven by “clear and convincing” evidence, while community property must be divided “in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.”

“Just and right” does not usually mean a 50-50 division of assets; something different usually makes more sense in a number of different scenarios.

Characterizing business interest can be tricky. For example, it may be separate because a spouse may have owned it before marriage. However, any increase in value during the marriage is usually community property.

Even more complex, if during the marriage community funds are invested into the business, if the separate and community parts become so comingled that they cannot be traced for division, the combined property may become community property.

Valuation

To properly place value on a business, the parties must usually retain expert accountants or appraisers. There are so many variables, including:

• Should it be valued as it would sell on the open market as a going concern?
• Should value be assigned to various components of the business such as business good will, intellectual property, outstanding stock, inventory, real estate, equipment and so on, added together, less company debt and liability?
• What if the success of the enterprise is largely dependent on the reputation, goodwill or unique skills of one of the spouses? What would happen to the value of the business if that spouse were no longer involved?

GUNNSTAKS LAW OFFICE in Plano represents business owners and clients married to business owners in divorce in the Plano area and throughout Texas.