A divorce in itself is a complicated process. But it gets even more complex when the spouses have to figure out what to do with a privately-owned business.
If you’re facing this situation, below are three important factors to consider.
The Value of the Business
It’s important to first look at the company’s financial statements, giving each side’s valuation expert equal access to the company’s books, tours of the company’s facilities, and time to interview the management. This is especially important for spouses who may not play as much of an active role in the business’s daily affairs as their partners do.
Inadequate discovery may cause an expert to miss important information, leading to an inaccurate valuation of the enterprise.
If the business interest was owned before the marriage, this may require the inclusion of the appreciation of the business’s value over the duration the marriage, which will, in turn, require an analysis of the current market conditions and comparing it with the business’ value at the start of the marriage.
What to Do in Case of Spousal Support Obligations
Under Texas law, which distinguishes community property from separate property, if one spouse started a business before the marriage, that company is his or her separated property. If it was started during the marriage, it will be community property, and thus divided equally upon divorce.
There are instances when it’s necessary to adjust the value of the business from the marital estate to avoid ‘double dipping,’ which happens when one spouse receives twice the recovery from one asset. Some courts will decide that it would be unfair for a spouse to receive spousal maintenance payments and a share of the business’s value, but this is not always the case—ultimately it depends on your state’s laws.
Honesty in Reporting Income
It’s common for a spouse who is a controlling shareholder of the business to hide assets and/or income to try and get a better deal during a divorce settlement. Hiding income and assets, or even exaggerating expenses and liabilities, can lead to a lower valuation of the business, which in turn, means lower child and spousal maintenance payments.
It’s for this reason that it’s important to work with an experienced valuation expert who knows how to find these kinds of anomalies.
When a business is part of a marital estate, a fair settlement during divorce hinges on the company’s accurate valuation. This can be done by working with a reliable divorce attorney and experience valuation expert who knows how courts handle property division and how spouses hide their income and assets to undervalue the business.