One form of the American Dream is building a business from the ground up and developing it over time into a source of pride and profit. Rarely does such development take place rapidly. Instead, it is far more often a labor of love and takes time, toil and talent to create a business that generates profit year-in and year out. To those who have realized (through their efforts) this form of the American Dream, divorce can be a daunting proposition, leaving business owners facing the fear that through the divorce, they may be losing their home, their family and even their business.
This article is for business owners facing a divorce in Texas who want to protect precious assets.
To answer the most pressing question, “Can my spouse take half of my business in divorce?” the simple and direct answer is, “Not likely.”
Is the Business an Asset?
The first evaluation is whether the business itself is even a community asset (subject to division by the Court during divorce). If not, the Court cannot address this asset under Texas constitutional law. The presumption in Texas is that all assets acquired during the marriage are community property. Under the “inception of title” doctrine, if the business was formed before marriage, the business owner may be able to establish – via clear and convincing evidence [business formation documents, tax records, profit and loss statements] – that the asset is separate property. However, If the business began during the marriage, the community property presumption will apply and the business will likely be considered a community asset.
As an Asset, How Does the Business Fit with Total Property Division?
Where there is a community property business as part of the marital community estate, rarely is that the sole asset owned by the community. Early in the divorce process, the parties and counsel will begin to put together a global picture of what constitutes the entirety of the community estate. This collection of information can be done through an informal exchange of documents and records or through formal discovery. The typical community estate in a Texas divorce contains a home (with a mortgage), some retirement, checking and savings, and credit card debt. In cases where the community estate features a business, that is just another asset that is to be addressed in the ‘just and right’ division of the entire community estate.
To put it simply, not every asset in the community estate must be divided or partitioned. For example, the Court will not order the parties to sell the SUV and split the proceeds. Instead, the husband will be awarded the sedan (at a certain value) and the wife will be awarded the SUV (at a certain value). The Court is not partitioning each asset but the entire community estate. For example, if the husband is awarded the business (at a certain value, as outlined in greater detail, below), then the wife may receive the house (at a certain value – including the equity therein) and a large portion of the retirement.
How is the Value of a Business Determined in a Divorce?
As part of the divorce process, assets not only need to be identified but must also be valued. For sizeable businesses, this often requires an expert to conduct a business valuation. In a contested divorce, this often requires competing experts. It is not altogether uncommon for the expert representing the business owner to value the business lower than the expert for the other spouse.
The value of any asset in Texas – including a business, is determined by the factfinder (a judge in a bench trial and a jury in a jury trial). The value of the asset is its “fair market value.” Fair market value means the amount that would be paid in cash by a willing buyer who desires to buy, but is not required to buy, to a willing seller who desires to sell, but is under no necessity of selling. State Bar of Tex., Texas Pattern Jury Charges: Family & Probate PJC 203.1 (2016).
However, determining the fair market value of a business, can be done in many different manners, even when applying that simple definition. Below is a list of the three most common approaches utilized by valuation experts:
(1) Income-based approach.
(2) Asset-based approach.
(3) Market-based approach.
The nuances of the business will dictate which approach is utilized. As noted above, the valuation by one expert may differ greatly from the competing expert. This requires the factfinder (judge or jury) to evaluate the expert witness’s credibility and the evidence presented to support the valuation presented.
How Does an Owner’s Personal Goodwill Factor into the Valuation Process?
An owner’s personal goodwill is not factored into the valuation process. The Texas Pattern Jury Charges define “personal goodwill” as the goodwill that is attributable to an individual’s skills, abilities, and reputation. Id. at 203.2. In determining the value of a medical practice or law practice, the factfinder is not to include the value of personal goodwill or the value of time or labor to be expended after the divorce into the valuation figure. Id. However, the factfinder can consider commercial goodwill, if applicable, of the practice that is separate and apart from personal goodwill. Id.
H0w Do I Protect My Business in a TX Divorce?
Armed with this article’s information and faced with a divorce involving a cherished business, a business owner should partner with an experienced family law firm, like GoransonBain Ausley.
A trusted, respected, and knowledgeable family lawyer will help you to properly value and protect your business to ensure a just and right division of the entire community estate.
Interested in learning how our team of trusted lawyers can help you with your family law matter? Contact us to schedule a consultation at our Dallas, Plano or Austin office.