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Specialty tag(s): Business Valuation in Divorce, Divorce, Divorce for Business Owners, Property Division

How to Protect the Future of Your Business in a Divorce

Thomas A. Greenwald | April 8, 2024

If you have spent your professional life building a successful business, it makes sense that you want to ensure that it continues to thrive after divorce. So what happens to a business in a divorce?

How Can a Divorce Affect Your Business?

In Texas, marital property is typically characterized as community property or separate property. All property owned by spouses at the time of divorce is presumed to be community property. The community property presumption can be overcome by clear and convincing evidence. If the community property presumption is overcome, the property is separate property. Separate property is defined as property owned before marriage, property acquired during marriage by gift, devise, or dissent, recovery for personal injuries sustained during marriage (except for any recovery for loss of earning capacity) and property acquired in exchange for separate property, proceeds from the sale of separate property, or property that can be traced to separate property. Community property is property acquired by either spouse during marriage other than separate property.

A business interest formed before marriage or capitalized with separate property during marriage may be separate property. If a court determines that a business interest is separate property, the business interest must be awarded to the spouse that owns the business interest as separate property.

But what if the business interest is community property? If you and your spouse both have a stake in a business, it is crucial to understand how divorce can impact the business interest. Common issues include:

• Division of Assets: If the business interest is categorized as community property during a divorce, its value will likely be divided between both spouses.
• Valuation Process: Determining a company’s value is crucial for a fair distribution of assets. This business valuation process may be invasive, necessitating access to business documents, financial records, and important staff members. The work is typically done by a forensic accountant or business valuation expert.
• Operational Disruptions: Divorces can be lengthy and complex, which can divert attention away from the core operations of the business and hinder its day-to-day productivity.

What Are Your Options Once Divorce Is Imminent?

If a divorce is imminent what are your options?

• Buy Out Your Spouse’s Share: One spouse may buy out the other spouse’s interest in the business, ensuring full control and continuation of the business. This may require a valuation to determine the appropriate the fair market value of the interest.
• Attempt Mediation: Opting for mediation over litigation can lead to more amicable settlements, potentially preserving the business’s confidentiality.
• Co-Ownership: Although not typically advisable, some couples choose to maintain their professional relationship and move forward as co-owners of the business. This requires clear communication and possibly redefining roles to avoid conflicts.
• Divide the Company into Two Businesses: If co-ownership is not feasible, the business may be split into two separate entities. Each partner may then run their portion according to their vision and expertise. This is a more complex solution but can cater to the strengths of both individuals.

Working with a divorce attorney who understands the nuances of business ownership can be incredibly beneficial, as they can make recommendations and explain the options available to business owners facing the challenges of a divorce that includes the division of property and a closely-held business.

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Business owners confronted with an impending divorce can ensure a stable and prosperous future for both themselves and the business by working with an experienced family lawyer. Contact Goranson Bain Ausley to take a strategic and tailored approach that supports your future goals and moves you toward achieving them. Schedule a consultation today to get started.