Small Business Today Magazine JUL 2014 PHENOMENAL PRODUCTS | Page 28
EDITORIALFEATURE
Are You Getting a Divorce and Own a Business?
Unique Issues Impacting the Business Value - Part 1
By Jeffrey D. Jones, ASA, CBA, CBI
I
f you own a business and you are getting a divorce, there are some unique
factors that can have a major impact
your marital estate in Texas. Whether or
not your spouse works in the business or
owns stock or partnership interest in the
business, your spouse is deemed to own
50% of your ownership interest in the business. The spouse operating the business is
known as the In-Spouse and the non-operating Spouse is known as the Out-Spouse.
Before a divorce can be finalized, the Court
will require that both sides submit an inventory of all the assets owned by the estate
and their market values.
If you and your spouse are unable to
come to an agreement as to the value
of the business, real estate, and personal
property, the Court will require appraisals
of the items in dispute. The value of the
business will often be the single largest item
in the marital estate. Its value, along with
the value of the other items owned by the
marital estate, will be utilized by the Court
in reaching a final opinion as to how these
assets will be divided among the parties.
Usually, the Court will allow the In-Spouse
to keep the business and offset that value
with the other assets owned by the estate
for the Out-Spouse. Sometimes, however, there is not enough value in the other
assets to offset the business value. In this
case, the Court may require the business
to be sold or utilize loans or promissory
notes to equalize the values.
In Texas, State and Case Law dictates
some unique factors that must be considered when valuing a business and/or
ownership interest therein. These factors
include who is qualified to conduct a business appraisal and which items are to be
included and excluded in the final opinion
There are two
circumstances under
which separate property
assets may come back into
the marital estate.
of value. These factors will be addressed in
a series of articles to come in the following
issues of this publication.
MARITAL ASSETS
All States consider a business a marital asset
whether in a Community Property State or
Equitable Distribution State. In Community
Property States, like Texas, the husband and
wife are deemed to own a business on a
50/50 basis regardless of their actual ownership or participation in the business. In Equitable Distribution States, the courts look at
the financial situation that each spouse will
be in after the termination of the marriage
and divides the assets in a manner fair to
each spouse, taking into consideration the
earning power of the spouses, separate
property of the spouses, the value that one
spouse contributed as the homemaker, the
duration of the marriage, the age and health
of the spouses, marital infidelity, and who
has the children, among others. In Texas, the
Courts will consider the financial situation of
each spouse after the divorce, the earning
power of the spouses, and separate property of the spouses, in reaching a final opinion
of value of the assets and their distribution
among the parties.
In marital dissolution cases, the courts
will require that both parties render a list
of the assets they own along with a determination of value. These assets are to be
identified as either marital assets or separate property assets. Assets, including a
26 SMALL BUSINESS TODAY MAGAZINE [ JULY 2014 ]
business acquired during the marriage, will
be included in the marital estate. Assets
acquired by either party prior to the marriage or assets obtained by way of gifts or
inheritance are usually considered separate property not included in the marital
estate for division purposes.
There are two circumstances under
which separate property assets may come
back into the marital estate. The first is
when marital assets and/or community
time and effort have been expended upon
the separate property assets. An example would be when community funds are
used to pay expenses of separate property assets or separate property income
is used to pay community expenses. In
these circumstances, many courts have determined that the separate property and
marital property assets have become so
commingled that they are indistinguishable.
The other circumstance which can bring
separate property into the marital estate
is when there has been growth in value
of t