Business owner interest valuation and division in divorce

Posted By Scroggins Family Law || 1-Apr-2016

When husband and wife divorce and one of them is the owner of a business, there is a special playbook experienced divorce attorneys use to properly assess and divide business assets. Whether a business is community property subject to division depends on whether the business and its income occur prior to or during the marriage. When businesses have valid and enforceable operating agreements and bylaws, there are additional elements to division. When the business is divisible community property, a business valuation should identify current and future values of business assets subject to division in divorce. In many cases, it is impractical and impossible to divide a business, in which case a buyout or alternate division can be used to make husband or wife whole.

Community property matters

Texas is a community property state and the Family Code specifies that which is not community property, assumed as owned equally by husband and wife, is separate property, which is wholly owned and retained by its owner in a divorce. Property and assets owned or claimed by a spouse prior to marriage, or that which is received by gift, devise, descent or by a personal injury award are separate property as a matter of law and are not subject to division in a divorce. If the husband or wife owned a business prior to marriage, they retain it wholly in a divorce. Of course, the income from the business is subject to assessment for purposes of child or spousal support, if applicable. If the business interest is acquired during the marriage, community property rules apply and the business is subject to division.

Business organizations and valuations

When a business is formed or a spouse obtains an interest in a business during a marriage and it is considered community property, there are several steps involved in identifying the value of the owner's interest. The first step must be obtaining and examining all business documents that define the ownership and operation of the business organization. There may be multiple owners with current and future vested interests in the business, often identified as percentages of the business assets and profits. If a business operating agreement addresses spouses and divorce situations, the rules of contract law may apply and be considered in the divorce process.

Business valuations are necessary to determine how much a business or a percentage of ownership is worth, in real dollars and future income and options. Referring back to the operating agreement, if any, compensation to an owner can include future profits, bonuses and shares of stock. A business may operate in with negative equity for years, paying salaries with business loans. The assets of a business include more than the value of the building, inventory and cash in the bank. Goodwill in the community and future earning capacity must be assigned a dollar value by a professional who makes calculations and determines the cash value of an individual's whole or partial ownership interest. The business valuator and their report are frequently cited in the divorce and at hearing or trial on financial matters.

Buying out your spouse to make them whole

If a business interest is determined to be community property subject to division the non-owner spouse is due their share of that business interest. Dividing a business or interest therein is not a practical solution in most cases, and a buyout is appropriate. If husband or wife owes the other $100,000 for their equitable share of a community property business asset, they might offset that debt by allowing the other to retain an equal amount of other cash assets or share of the proceeds of a marital residence, for example. Pensions and spousal maintenance can also be used in the financial calculations used to make spouses whole in the divorce.

When husband or wife owns a business and the other spouse works to build or maintain the business, they may be due a credit in value of such efforts. In the Texas Family Code, a claim for reimbursement may include, "inadequate compensation for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of that spouse. [i]"

Dallas and Collin County Board Certified [ii] divorce and family law attorney, Mark Scroggins, along with their team at Scroggins Family Lawadvise and represent husbands and wives with business ownership interests, in complex and often high-net worth divorce cases.

At Scroggins Family Law, our Dallas and Collin County divorce attorneys have more than over 20 years of collective experience with family law cases. When you retain our firm, you can trust that your case is in the hands of a highly skilled, dedicated professional. we understand the unique challenges of a high value divorce case, and more importantly, have the knowledge and experience you need on your side. Call us today to learn more about Texas divorce and family law: (214) 469-3100.