Business Owners
& Divorce
What happens to your business when you get a divorce?
During divorce, courts characterize property and decide whether the property is a couple’s jointly owned property or whether only one spouse owns the property. Characterization of property is done for the purpose of property division. The terms for these two types of property are marital property and separate property.
How does your business differ from other property?
Many factors play a part in characterizing a business. For example, did one spouse establish and run the business? If so, did they create the business prior to marriage? Does the couple have a prenuptial or postnuptial agreement that sets guidelines for property division if divorce occurs? Does the agreement lay out provisions for dealing with the business? As part of asset protection, did the business incorporation papers establish terms and conditions in the event of a partner’s divorce? Is the business co-owned by both spouses, who run the business together?
The answers to these questions can provide facts that a court would use in determining whether to view the business as a marital asset, therefore making it subject to property division.
In addition, the personal income generated by a business falls into the category of marital property. This is true in general for income that both spouses earn during their marriage. It would be the business owner’s responsibility to show that they did not use income from a separately owned business to pay for family assets, such as the home, the family’s cars, furniture, or for other living expenses for their spouse and children.
If a business is characterized as marital property, what happens next?
The first step would be to determine the business’s worth through valuation. We can refer you to a CPA who is a certified business valuator to assess the value of your business. Financial experts use a variety of methods, such as:
Market value. What would your business sell for on the open market? Evaluating your business in relation to comparable businesses that are currently selling is how the CPA would arrive at this value.
- Value of business assets. The financial expert would estimate the value of all tangible and intangible business assets. For example, tangible assets would include: office building and land if you own it, computers, furniture, etc. Intangible assets include intellectual property, client lists, debts, brand recognition, projected future income and goodwill. Enterprise goodwill refers to the ability of the business to bring in new clients/customers based on its brand recognition. Personal goodwill is the value you bring to the business as the business owner based on your capabilities and reputation. Also, take note that courts view personal goodwill as separate property, not marital property.
- Value based on income. A financial expert would compare income records with expenditures and past statistics to estimate business profits. This valuation bases business value on how much net profit the company can generate.
What are some ways to handle business property division?
Let’s say you own the business. The following would be some options for dealing with property division.
Keep the business
Once you have established what your business is worth, your attorney can negotiate with your spouse’s attorney to buy out your spouse’s share in the business. That way, you can keep it and continues to operate it.
Exchange assets
Ways to do this might involve giving the spouse a comparable asset for the business. Perhaps your share in the family home is of comparable value. Or, maybe some of your investments would be comparable. Another option is arrange recurring payments until you pay off the spouse’s share.
Sell the business
You could sell the business and divide the proceeds based on a fair and just amount for both you and your spouse. You can determine the split through negotiations or let the judge decide for you, if you take the matter to court.
Continue joint ownership
If you and your spouse are able to get along as co-business owners, you could continue joint ownership. Obviously, being able to work together is key for making this option viable.
Find out how we can help you with business property division
Let’s discuss your objectives for divorce. We have considerable experience helping clients resolve business related divorce issues, which includes working with a network of financial professionals who are experts in this area. Let’s address your concerns and devise a strategy that is in your best interest.
Call 940.566.0606 to schedule an appointment.
Reach out to us
DTX Family Law
525 S. Locust Street, Ste. 100
Denton Texas 76201
Phone: 940.566.0606