Divorce Pitfalls for Small Business Owners

 The prospect of getting a divorce can be daunting, and even more so if you own a small business. When a marriage ends and both parties own a business, it can be complicated to navigate the legal and financial aspects of a divorce. What are are the top considerations for small business owners facing divorce?  

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Whether you are considering filing for divorce, or your spouse has already initiated the divorce process, there’s important considerations when a small business is part of the equation.

If you're a business owner and one or both of you are seeking a divorce, there are some particular points of concern that you need to keep in mind. First and foremost is the value of the business itself. The court may order an appraisal of the business to determine what the fair market value is. This is so each party can receive an equitable share in the assets. If one of you was the sole owner of the business prior to marriage, the court may decide that ownership of the business isn’t subject to division but the increased value of the business is.

Another point to consider is how much of your time and resources the divorce process will take up. Divorce can impact how much time and attention you can put into your business, as well as how smoothly operations run while the divorce is underway. It’s important to make sure that both parties understand their respective roles in the business during the divorce proceedings. If one or both spouses are also employed by the business, those roles need to be specified in order to ensure that everyone remains in compliance with any court orders that may be issued.

If you are considering filing for divorce and are a small business owner, it’s important to seek professional counsel on how best to protect your rights and interests in the process.

Valuing Property In a Texas Divorce

Although appraisers and valuation experts may be used to determine how much property is worth, spouses are generally qualified to testify about the value of property in which they have an ownership interest. Barstow v. Jackson, 429 SW2d 537.

Property is valued at the "fair market" value. This is defined as the price a willing buyer, would pay for the property in it's current condition at the time of trial. I often refer to this as the "yard sale" value- that is, what could you get for a particular piece of property if you put it on your front lawn with a "for sale" sign on it.

Some assets are very difficult for a non-expert to value such as:

• present value of future interests (such as annuities or pension plans);


• small family businesses and closely held businesses;
  
• goodwill

Coming up with a dollar figure for these type of intangibles can be very difficult, and often times experts themselves value these very differently. In these cases, there is often a "battle of the experts" that is waged and the judge must judge the weight of the evidence based on the credibility of the experts.

Finding Property

The first step in any property division is first locating the property that might be out there.

Remember that in Texas property is either characterized as separate or community. If it is community, it is subject to division of the court and therefore should be identified so the court can divide it. If it is separate it will still need to be identified so that the court can formally declare it as separate property. Without a separate property finding by the court, the particular item- be it your dear departed aunt Sally's china or the stocks your purchased prior to marriage could be still at risk of being awarded to your former spouse. This is because most decrees of divorce contain a clause that any property not disclosed will be subject to future division of the court.

At the beginning of a case in which it looks like lot of property issues will be involved, it is a good idea to start a property file. it will contain cover sheets of financial statements, health insurance, insurance policies, deeds, employee benefits, 401(k) statements, brokerage accounts, etc. This will provide a good start in drafting a preliminary spreadsheet of what property exists and where to begin digging deeper.

It is generally a bad move to try to conceal property during a divorce. If there is a doubt that one of the parties are not being voluntarily forthcoming in disclosing all the property that exists, any divorce lawyer worth his or her money will use pre-trial discovery to uncover the truth of what exists. This can include reviewing of all financial records including bank deposits, tax returns, accounting books, deposit slips etc. In addition, parties generally must exchange Inventories and Appraisements, which are sworn statements that detail all property of the parties whether they are of a community or a separate nature. If it later turns out that one of the parties was intentionally not being truthful, the judge or jury can punish that party by rendering awards of property that grant most of the property to the innocent party. This is in addition to the possibility of being charged for perjury and false swearing.