Practice Areas

Divorce and Family Businesses

A divorce involving a privately held or family business presents questions that do not arise in an ordinary property division. The first question may be whether the business is community or separate property, but that is often only the beginning. The parties may also disagree about the business’s value, income, debt, ownership, or what should happen to it after the divorce. These cases can require complex financial issues to be presented to the court in a clear and understandable way.

FAQs

Is a Business Community or Separate Property?

Texas is a community property state. Property possessed during or at the dissolution of marriage is presumed to be community property unless its separate character is proved by clear and convincing evidence. A business interest acquired before marriage can be separate property if its separate character can be proven. Likewise, a business interest acquired by inheritance may be separate property. A valid premarital agreement may also affect the characterization and division of business interests.

The date and manner in which the ownership interest was acquired matter. So do changes in ownership, additional capital contributions, agreements between owners, and transactions occurring during the marriage.

Importantly, determining whether a business interest is separate property is different from determining whether other financial claims by the other spouse may exist involving that business.

Business valuation is frequently one of the central issues. Revenue does not equal value, and neither does the amount of money an owner takes home.

Depending on the business, valuation may require examination of financial statements, tax returns, debt, assets, historical earnings, expected future earnings, owner compensation, distributions, customer concentration, and other financial information. Accountants or valuation professionals may be necessary when value is disputed.

If a business is proven to be separate property, the court cannot award that separate-property interest to the other spouse. Its value, however, may still be relevant to other issues presented in the divorce.

Closely held businesses can present additional questions involving goodwill and whether value attributed to the company depends upon a particular owner’s personal reputation, skills, or relationships.

A divorce does not necessarily mean a business must be sold or divided between the spouses. One spouse may retain the business while the other receives different property. In the appropriate case, a negotiated buyout structured with adequate security may provide a practical solution. Ownership interests and governing agreements can also affect the available options.

When both spouses are actively involved in the company, consideration may need to be given to management, access to information, compensation, employees, customers, and operation of the business while the divorce is pending.

Preparing for a Divorce Involving a Business

The more significant the business is to the marital estate, the more likely we are to recommend retaining a qualified business valuation expert. Having the right expert evaluate the business and explain its value at the appropriate time—before mediation or trial—can materially strengthen a client’s ability to evaluate settlement options and pursue the best available outcome. To support a client’s position on value, obtaining financial information early is important. Relevant records may include tax returns, profit-and-loss statements, balance sheets, bank records, ownership documents, shareholder or company agreements, loan documents, payroll information, and records of distributions. Sophisticated discovery, including discovery directed to third parties, is often necessary. Obtaining and analyzing that information requires patience, diligence, and persistence. Our role begins by identifying the questions that actually need to be answered: What is owned? How was it acquired? What is it worth? What income does it produce? What financial claims exist? And what outcome is workable after the divorce? We work with our clients to ensure they understand the strategy, appreciate the reasons behind it, and actively participate in the decisions necessary to pursue their goals. Answering these questions carefully can allow the business and the divorce to be addressed without creating unnecessary disruption to either.

Real World Examples Drawn From Actual Experience

  • KDL client awarded all of the businesses despite them being held in the other spouse’s name. Client successfully used expert testimony on her goodwill associated with the business and leveraged that to make any other scenario impractical.
  • KDL client awarded all businesses at an unheard-of low value by playing up creative ways of maximizing goodwill and fully evaluating worst-case scenarios based on market factors outside of everyone’s control.
  • KDL client values spouse’s businesses with lowest goodwill factor by highlighting the extensive marketing and advertising campaign directed away from the individual spouse as well as drilling into how replaceable the business-owning spouse was in it.
  • KDL client awarded a greater amount of liquid assets in exchange for a quick buyout of client’s interest in businesses by expanding client’s influence over the business as permitted by corporate documents.
  • KDL client awarded all commercial real property at a favorable value, as opposed to being sold, because we presented evidence of how dependent the company’s operations were on the real estate.
  • KDL client awarded temporary possession of a business during the pendency of the divorce over the other spouse’ allegations that he was the key man of the business.

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