Determining the value of a business interest and which spouse will own all or part of it after the divorce is often the subject of tough negotiations and litigation. If you’re a Texas business owner contemplating or already involved in a divorce, an experienced Dallas divorce lawyer at Epstein Family Law can help you resolve the following issues either in or out of the courtroom.
What Happens if My Spouse and I Can’t Agree Who Will Own a Business Interest after the Divorce?
When spouses can’t find common ground and make a deal regarding ownership of a business interest, the court will step in and resolve the issue based on the unique circumstances of the case. The most common solution is the one many couples reach amicably without a court order: one spouse assumes full ownership, and the non-owning spouse either receives cash from the other spouse or is awarded other community assets in exchange for giving up all of his/her rights to the business interest.
The court can also order a “partition in kind,” which means ownership is divided 50/50 between the spouses. Courts typically avoid this option since forcing ex-spouses to own a business together often leads to more litigation down the road. Finally, if the spouses are 100% owners of a business, the court can order a sale, but this is usually a last resort when other options won’t work, are impractical, or would not provide for a just and right division.
Personal Goodwill Is Not Included in a Business Valuation
Disputes over the value of closely held companies during a divorce often focus on whether a business has personal goodwill (discounted from the valuation) or commercial goodwill (included in the valuation). Every business is unique, and professional appraisers will frequently disagree about what the discount for personal goodwill should be in a business valuation.
Personal goodwill – the intellect, expertise, and relationships an owner brings to the business – is usually the largest asset in a small company, but you won’t find it anywhere on the books. It belongs to the owner who built the business and is separate property excluded from division. A good example is a solo medical practice that has become successful based primarily on the doctor’s unique skill, expertise and experience.
Commercial goodwill, on the other hand, can be passed from owner to owner and is included in the business valuation. It covers a variety of company assets, such as the brand name (if not the owner’s name), client list, vendor list, patents and other intellectual property, website domain name, phone number, office location, and much more.
Determining the Value of Non-Controlling Business Interests
Non-controlling business interests (less than 50% ownership and no voting power) acquired during the marriage are also subject to valuation and division in a divorce. When determining how they should be divided, courts will typically discount the valuation amount to account for the lack of voting power or control and then award the non-owning spouse community assets equal to the discounted value of the business awarded to the owning spouse.
About Robert Epstein
Robert Epstein is an experienced family law attorney with the strategic capabilities, creativity, and intense drive to resolve challenging cases both in and out of the courtroom. Board Certified in Family Law by the Texas Board of Legal Specialization since 2014, Robert has been recognized for his expertise in family law by Best Lawyers in America, Super Lawyers, and D Magazine’s Best Lawyers in Dallas. Contact us to schedule a consultation.