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

How to Protect Your Business in a Divorce: What Can Happen and How You Can Mitigate the Effects

Thomas A. Greenwald | September 9, 2024

Divorce is challenging and complex, but this is especially true for anyone owning a business. Between community property laws, complicated valuations, and managing everyday operations, understanding how to protect your business is essential for divorcing business owners in Texas. Only by being aware of the potential effects of divorce on a business and developing strategies for how to protect your business from the divorce can you be safeguard the future of your company.

How Texas Community Property Law in a Divorce Affects Your Business

One of the most important things to be aware of when considering what happens to a business in a divorce is that Texas is a community property state. This means that assets you acquired during your marriage, including businesses, are generally considered marital property and subject to division at the time of divorce. While this may sound concerning if you want to protect your business in the divorce, it’s important to remember that the court will attempt a “just and right” division of community property. This division can be handled in several ways and does not automatically mean you will lose ownership of your company.

If you established your business before the marriage, it may be considered separate property. However, just because your business is labeled as separate property doesn’t mean it is free from any effects during the division of property. Knowing how to protect business assets in a divorce starts with distinguishing between community property and separate property.

Valuation and Determining What Happens to the Business in the Divorce

If your business is subject to property division during the divorce, a valuation should be done to establish the company’s worth. This is a critical step in the divorce process and helps ensure the just and right division of property. Common business valuation methods include:

• Income Approach: Estimating future earnings
• Market Approach: Comparing to similar businesses
• Asset Approach: Calculating total assets minus liabilities
• Combination Approach: Combination of Income Approach, Market Approach, and Asset Approach

Regardless of the approach used, the importance of a professional appraisal cannot be overstated during this phase. Your valuation should be conducted by a CPA or other financial professional who is specially trained in the process to ensure an unbiased and accurate calculation.

Once the business is valued, you will have a few options for how to divide it. The impact of divorce on a company can be largely affected by which option you choose.

The division options include:

• Buyout: One spouse buys the other’s interest in the business. This may involve cash payments, loans, or exchange of other assets for the business interest.
• Co-Ownership: Both spouses continue to own and operate the business together. This requires clear written agreements and defined roles.
• Sale of the Business: Selling the business and dividing the proceeds. This can be the simplest solution if neither spouse wants to continue running the business or if no other agreement can be reached.

Minimizing What Happens to a Business During Divorce

Protecting your business from divorce involves more than just ensuring a fair division of assets. As a business owner, it is still up to you to ensure that the business continues to function on a day-to-day basis as you proceed through your divorce. Doing so can be easier said than done, as a divorce can disrupt daily operations and affect employee morale.

To minimize disruptions to the business during the divorce:

• Maintain Separate Finances: Avoid commingling personal and business funds.
• Communicate Clearly With Staff: Keep employees informed to maintain stability.
• Plan for Contingencies: Prepare for potential operational challenges.

Potential Strategies for Protecting a Business in a Divorce

The best steps to take to safeguard your business are usually proactive measures. This requires understanding how your divorce might affect your business early on so that you can better prepare for the future. Strategies you can employ before a divorce include:

• Prenuptial or Postnuptial Agreements: These agreements can specify the business as separate property, thus protecting business assets from divorce and the division of property it entails.
• Buy-Sell Agreements: These contracts restrict the transfer of business interests, protecting the business from being divided or sold in a divorce.
• Trusts and Business Restructuring: Placing the business in a trust or restructuring it may help shield it from being divided.

Contact Goranson Bain Ausley Today

While there are several ways to protect a business from divorce, the best option will always start with hiring a skilled and accomplished family law attorney. Work with a knowledgeable attorney early in your case to develop a strategy to protect your business.

The experienced attorneys at Goranson Bain Ausley are ready to help you navigate the complexities of divorce while protecting your business interests. Contact us today to schedule your consultation.

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