A Texas divorce is a difficult and painful process and can be especially stressful and complicated for a business owner. Many issues arise whether one or both spouses are owners of the business.
There are some steps you can take to protect your business, but these need to be implemented long before a divorce is imminent.
- Company operating agreements and shareholders’ agreements frequently contain buy-sell provisions addressing what happens in the event of a divorce.
- A Buy Sell Agreement specifies how the ownership interests of the business will be reacquired by the business owners or the company in the event of a divorce.
- A premarital agreement defines how assets and debts of the couple are allocated in the event of a divorce.
Managing A Business During a Divorce
Keeping your business healthy throughout the divorce process can be extremely difficult.
Going through a divorce is a huge distraction for a business owner. It takes tremendous time and energy away from running the business. Employees are often concerned about their jobs and the future of the business. If both spouses can explicitly acknowledge their mutual interest in keeping the business healthy and use a divorce process that allows for the orderly, planned use of time and resources, then the business owners present a confident, controlled picture of the business when they interact with third parties and employees.
If both spouses work at the company, it is especially important to put agreements in place regarding each spouse’s rights, duties and responsibilities regarding running the business.
Most business owners want to keep information about the operations of the business to remain confidential. The divorce process may expose the confidential inner workings of the business to public scrutiny. Any court records, including testimony and exhibits regarding business operations, management and valuation, are public records.
Who Gets the Business?
Depending on the facts and the law of the governing jurisdiction, your business may be a divisible marital asset.
In Texas, the first step is to decide whether the business entity is community property. Often this determination is based on many factors, including when the business started (before or during the marriage), what funds were used to start the business (separate property or community property), whether the business changed formation during the marriage, and whether community funds were invested into the business during the marriage. Even if the business is determined to be separate property, the increase in the value of the company during the marriage resulting from the management efforts by the owner spouse may be deemed community property.
If it is determined the business is a marital asset, then the divorce needs to determine who will be awarded the business. While it is possible for both spouses to be awarded a share of the business, it is more likely one spouse will be awarded the business (typically the spouse more involved and essential to the functioning of the business), while the other spouse’s interest will be bought out.
What is the Value of the Business?
The value of the business depends on many different factors, including the company financials, the business assets, the properties the business owns, its current customers, and intangible goodwill. There may be documents with buy sell provisions or a Buy Sell Agreement that specify formulas or guidelines for determining the value of the ownership interests. Otherwise, it may be necessary to hire a professional business valuation expert to evaluate the business and prepare a report analyzing the business and appraising its value.
The business needs adequate cash flow to operate. Frequently, the payout to the non-owning spouse needs to be structured over a period of time so the business can continue to function.
Without question, divorcing as a business owner is more complicated than the normal situation where the parties are employees with typical assets (such as real estate, 401(k) plans, vehicles, etc.). It is important for business owners to work with a good divorce attorney and a good business attorney to protect and preserve their businesses.